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Say you have an unincorporated sideline activity that you think of as a business. If your expenses from the activity exceed your revenues, you have a net loss. You may think you can deduct that loss on your personal federal income tax return. Not so fast. The IRS likes to claim that money-losing sidelines are hobbies rather than businesses—because the federal income tax rules for hobbies are not in your favor.Thanks to an unfavorable change included in the new Tax Cuts and Jobs Act (TCJA), the rules are even worse for 2018-2025.But don’t give up hope. If you can show a profit motive for your activity, you can deduct the losses. And history shows that the IRS loses about as many court cases on this issue as it wins. Here’s what you need to know about the TCJA change for hobby-related deductions and what to do about it if you have a money-losing sideline activity.

Already-unfavorable tax rules for hobby-related deductions just got worse

If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill accordingly. On the other hand, the tax results are not good if your money-losing sideline activity must be treated as a not-for-profit hobby.Under prior law (before the TCJA), you could potentially deduct hobby-related expenses up to the amount of income from the hobby. However, you had to treat those expenses as miscellaneous itemized deduction items that could only be written off to the extent they exceeded 2% of adjusted gross income (AGI). And, if you were a victim of the dreaded alternative minimum tax (AMT) for the year, your otherwise-allowable hobby deductions were completely disallowed under the AMT rules.