Daniel Rowe
Daniel Rowe

When is art a business? Hobby losses for artists

What are the relevant factors in determining whether an artist, writer, or musician has a sufficient profit motive?

January 16, 2014
by Daniel Rowe, CPA

The Sec. 183 hobby loss rule aims to prevent taxpayers from sheltering taxable income with losses that are more appropriately classified as personal expenses. The rules have been applied to deny losses in activities as wide-ranging as farming, drag racing, and the practice of law. But certain artistic activities lend themselves more to IRS challenges than others, particularly photography, painting, writing, and music. This article looks at the hobby loss rule as it has been applied to artists in a number of Tax Court cases.

Sec. 183 and Regs. Sec. 1.183-2

Sec. 183 prohibits a deduction for any loss from an activity that is not engaged in for profit. Deductions are allowed to the extent of any income, but not beyond that to prevent the taxpayer from offsetting other taxable income with a loss generated through a hobby or a personal or recreational undertaking.

An activity not engaged in for profit is one for which deductions are not permitted under either Sec. 162 or 212. Sec. 162 allows deductions for ordinary and necessary expenses incurred in carrying on a trade or business, while Sec. 212 allows deductions for expenses for producing or collecting income or for managing, conserving, or maintaining property held to produce income. Determining whether an activity is a hobby subject to Sec. 183 depends on whether the taxpayer had an actual and honest profit objective. This is often a subjective determination based on all the facts and circumstances, as a taxpayer’s intent may be difficult to prove.

An objective test under Sec. 183(d) provides that if the activity is profitable in at least three of the previous five tax years, it will be considered an activity engaged in for profit, but this presumption is not definitive. The IRS may still prove otherwise based on facts and circumstances. The primary benefit of meeting the presumption is that the IRS may be less likely to challenge a loss if the taxpayer meets the test. Taxpayers should nonetheless have other evidence to prove profit motive.

Regs. Sec. 1.183-2 contains nine factors for determining whether a profit motive exists:

  1. The manner in which the taxpayer carries on the activity.
  2. The expertise of the taxpayer or his advisers.
  3. The time and effort the taxpayer expends carrying on the activity.
  4. The expectation that assets used in the activity may appreciate in value.
  5. The taxpayer’s success in other similar or dissimilar activities.
  6. The taxpayer’s history of income or losses.
  7. The amount of occasional profits, if any.
  8. The taxpayer’s financial status.
  9. Whether the activity has elements of personal pleasure or recreation.

Although IRS examiners and the courts use these factors in making hobby loss determinations, they are not intended to be exclusive, and no one factor is conclusive. Not every factor applies in every situation, as discussed in the next section.

Relevant factors for artists, writers, and musicians

In evaluating whether a writer, musician, or artist has a profit motive, certain factors tend to be more relevant than others, for the same reasons artists are so frequently challenged by the IRS: the pleasure inherent in pursuing creative activities. While people probably do not choose to engage in any particular profession without deriving some enjoyment from it, creative activities such as painting, photography, and music tend to provide enjoyment to both hobbyists and professionals, unlike say, accounting or health care—activities in which profit motive is rarely questioned.

In addition to the elements of personal pleasure factor, artists’ profit motives are often challenged under the taxpayer’s history of profit and losses (factor No. 6) and financial status (factor No. 8). Under factor No. 8, “[s]ubstantial income from sources other than the activity … may indicate that the activity is not engaged in for profit especially if there are personal or recreational elements involved” (Regs. Sec. 1.183-2(b)(8)). This factor was presumably aimed at wealthy taxpayers who attempt to shelter substantial income with recreational or hobby expenditures, but it is often used to challenge artists’ profit motive.

It is difficult to make a living, much less consistent profits, as an artist. Many professional artists have other jobs to make ends meet. Fortunately, a number of Tax Court cases, including the recent case of Gullion, T.C. Summ. 2013-65, demonstrate that the court gives less weight to factors No. 6, No. 8, and No. 9 and more weight to factors No. 1, No. 2, and No. 3 in determining the taxpayer’s intent.

The IRS disallowed Gullion’s Schedule C losses from his musical career because he was not engaged in the activity with the objective of making a profit. He had played saxophone professionally since he was 16, studied music at Indiana University, and spent seven years trying to be a full-time musician, but he then started working as a computer programmer. During that time, he continued to play the saxophone, organized a jazz festival, and recorded four CDs. For the two years under examination, he reported a net loss of nearly $60,000, offsetting a portion of his computer programming wages.

The IRS contended that during the years that he was employed full time as a computer programmer, Gullion did not have a profit motive for his music activity. The Tax Court, however, found that, based on the most relevant factors: the taxpayer’s expertise and the time and effort he expended in carrying on the activity, he did have a profit motive. He played professionally for many years and studied and performed with well-known musicians. Gullion was able to demonstrate that despite working full time as a programmer, he “was dedicated to his music career.” He also “retooled his career” to become profitable. This evidence was deemed more relevant than the fact that Gullion had a history of losses in his music activity, that he had another source of income to support the music activity, and that he implicitly derived personal pleasure from playing music.

Gullion’s music business had a long history of losses, totaling over $100,000. But the court stated that, “economic success in the arts … frequently takes longer to achieve than success in other fields.” Because of this, a history of losses in an artistic activity has traditionally carried less weight in the Tax Court’s analysis than it would for other industries. This concept was first established in Churchman, 68 T.C. 696 (1977), a significant case for creative professionals facing Sec. 183 challenges.

Gloria Churchman was an artist in multiple disciplines for more than 20 years. She exhibited and marketed her work, and she sold a number of pieces. Over those years, income from the sale of her artwork never exceeded her expenses, and the IRS sought to disallow her losses, claiming the art activity was carried on as a hobby. The taxpayer’s spouse was employed as a professor, and she did not depend on the sale of artwork for her livelihood.

Despite this and her long history of losses, the Tax Court held that Churchman carried on her artistic activities “with a bona fide intention and expectation of making a profit.” That the taxpayer did not depend on the success of her artistic activities for her livelihood was irrelevant, as profit motive need not be linked to a desire for material wealth, but may be seen as a symbol of success in a chosen field such as art or entertainment. Most notably, the court addressed the taxpayer’s history of income or losses, by stating “a history of losses is less persuasive in the art field than it might be in other fields because the archetypal ‘struggling artist’ must first achieve public acclaim before her serious work will command a price sufficient to provide her with a profit.”

This “struggling artist” concept was applied to Gullion in weighing the significance of his history of losses, and has been cited in other successful challenges to the IRS by artists. In Vitale, T.C. Memo. 1999-131, an author argued that his writing activity was engaged in with the intent to make a profit. The IRS contended that his continuous history of losses was clear evidence that he was not. Vitale believed (and the court found that he was a credible witness) that despite the losses, his writing efforts would be rewarded with substantial income in the future. The court wrote that Vitale’s “losses should be viewed in the context of the nature of [his] activity. … This field appears to pay large amounts of money to those who succeed in it.”

To establish a profit motive, the expectation of profit need not be reasonable, but it must be honest. Regs. Sec. 1.183-2(a) states that a small chance of making a large profit may be sufficient to show intent, as in the case of an investor in a wildcat oil well who incurs great expense for an unreasonable chance to strike it rich. Likewise, even if the chance that Vitale (the author) or Gullion (the musician) will become wealthy or successful in his career is slim, this is not a sign of lack of profit motive. In Calarco, T.C. Summ. 2004-94, which held that a full-time professor who conducted an unprofitable playwriting business was engaged in a business venture with profit intent, Judge Mark Holmes wrote that “economic success in the world of fine art frequently takes longer to achieve than success in other fields. The same is true of literature.”

Where the taxpayer has another job or career, the courts have downplayed the significance of a taxpayer’s financial status. Struggling artists often have other sources of income to live off while pursuing their ultimate goal of profiting from art. This factor, however, may be more relevant where the taxpayer has significant income from other sources that is being sheltered by these losses. In the cases discussed above, as in many other cases involving artists, the other income was not significant and was merely covering their costs of living and pursuing their creative ventures.

When considering the elements of personal pleasure or recreation, a case can be made that most, if not all, artistic activities have these. However, as Regs. Sec. 1.183-2(b)(9) stipulates, “the fact that the taxpayer derives personal pleasure from engaging in the activity is not sufficient to cause the activity to be classified as not engaged in for profit,” if other factors indicate the contrary. Pleasure is not irreconcilable with a profit motive.

So, what matters?

The courts have consistently looked to the manner, expertise, and time and effort expended in determining profit motive for creative professionals. Gullion proved that he carried on his musical career as a business, changing strategies in an attempt to be profitable. Churchman operated her activity in a businesslike manner, including keeping a mailing list to announce her shows, traveling to show her art, and keeping records of sales and expenses. Vitale managed his activity in a businesslike fashion, keeping accurate records of expenses and making specific efforts to promote his work. His attempt to engage a literary agent and his search for additional publishers demonstrated his profit objective. In all four cases, the taxpayers’ expertise was heavily weighted in determining profit motive. The taxpayers all had extensive education and practical experience in their respective fields.

Contrast this to the recent case of Schlievert, T.C. Memo. 2013-239, in which a biology professor and biotech founder, with no previous experience with the music or record industry, started a label to produce a record for a band that his daughter discovered. The record label activity sustained a loss of $44,445 and had no sales or receipts, while Schlievert earned a $218,034 salary and had a net worth of $1.8 million for the year. The taxpayer’s lack of music industry expertise and failure to show that he thoroughly researched the business or consulted with experts were factors in the court’s decision to uphold the IRS’s disallowance of the losses. He also did not operate the activity in a businesslike manner: He did not form a legal entity, even though he had been advised to; did not keep financial statements or separate bank accounts; did not advertise the label; and did not pursue basic strategies to make the activity profitable. He represented only one band and made no effort to find any other musicians. These facts and the lack of time and effort devoted to the activity were strong indications that Schlievert did not have a profit motive for the record label.

The same factors contributed to the disallowance of a taxpayer’s loss from his recording studio/music producing activity in Wesley, T.C. Memo. 2007-78. Wesley was employed as an engineer earning $95,246 in wages for the year. He decided to spend about $20,000 to purchase and install professional recording equipment in his home. In upholding the IRS’s disallowance of the loss, the court noted that Wesley did not carry on the activity in a businesslike manner. He did not keep regular records, providing only $615 of recording receipts from eight years earlier, and did not present any evidence that an artist seeking to make a profit would not find it ordinary and necessary to spend $20,000 on equipment. Wesley also did not provide any evidence of his expertise, qualifications, or the amount of time he spent on his recording activity.


An examination of Schlievert’s and Wesley’s unsuccessful challenges and the court’s determination that Gullion, Churchman, Vitale, and Calarco had profit motives illustrate that the manner in which the taxpayers conduct their activity, their relevant expertise, and the time and effort expended are critical factors in establishing profit intent for artistic activities. Attention to these factors is essential for creative professionals to demonstrate that their activity is truly a for-profit venture and not simply a hobby.

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Daniel Rowe, CPA, is a tax partner in the Savannah, Ga., office of TJS Deemer Dana LLP.