§183 — Title 26 Internal Revenue Code | U.S. Code

Summary

If an individual or an S corporation does an activity that is not done to make a profit, they generally cannot take tax deductions for it except as explained here. Two kinds of deductions are allowed. First, deductions that are allowed even when there is no profit motive. Second, deductions that would be allowed only if the activity were for profit, but only up to the amount by which the activity’s gross income for the year is more than the first kind of deductions. The term "activity not engaged in for profit" means any activity except ones where deductions are allowed under section 162 or under paragraph (1) or (2) of section 212. If an activity shows gross income greater than deductions for 3 or more years in any 5-year period ending with the current year, it is presumed to be for profit unless the IRS proves otherwise. For horse breeding, training, showing, or racing, the test is 2 years out of 7. A taxpayer can elect to delay this determination until after the 4th year (6th for horse activities); if they do, special rules apply and the IRS has extra time (not expiring before 2 years after the filing date, without extensions, for the last year in that 5- or 7-year period) to assess any tax deficiency.

Title 26, §183

Internal Revenue Code — Source: USLM XML via OLRC

(a)In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.

(b)In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed—

(1)the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and

(2)a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).

(c)For purposes of this section, the term “activity not engaged in for profit” means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.

(d)If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting “2” for “3” and “7” for “5”.

(e)(1)A determination as to whether the presumption provided by subsection (d) applies with respect to any activity shall, if the taxpayer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) following the taxable year in which the taxpayer first engages in the activity.

(2)If the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activity, if the gross income derived from the activity for 3 (or 2 if applicable) or more of the taxable years in such period exceeds the deductions attributable to the activity (determined without regard to whether or not the activity is engaged in for profit).

(3)An election under paragraph (1) shall be made at such time and manner, and subject to such terms and conditions, as the Secretary may prescribe.

(4)If a taxpayer makes an election under paragraph (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined without extensions) for filing the return of tax under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2014—Subsec. (e)(1). Pub. L. 113–295 struck out “For purposes of the preceding sentence, a taxpayer shall be treated as not having engaged in an activity during any taxable year beginning before January 1, 1970.” at end. 1988—Subsec. (e)(2). Pub. L. 100–647 substituted “activity for 3 (or 2 if applicable)” for “activity for 2”. 1986—Subsec. (d). Pub. L. 99–514 substituted “3” for “2” before “or more” in first sentence and “ ‘2’ for ‘3’ and ‘7’ for ‘5’ ” for “the period of 7 consecutive taxable years for the period of 5 consecutive taxable years” in second sentence. 1982—Subsec. (a). Pub. L. 97–354 substituted “an S corporation” for “an electing small business corporation (as defined in section 1371(b))”. 1976—Subsecs. (d), (e)(3). Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”. Subsec. (e)(4). Pub. L. 94–455, § 214(a), added par. (4). 1971—Subsec. (e). Pub. L. 92–178 added subsec. (e).

Statutory Notes and Related Subsidiaries

Effective Date

of 2014 AmendmentAmendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a

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, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title.

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

Effective Date

of 1986 AmendmentAmendment by Pub. L. 99–514 applicable to taxable years beginning after Dec. 31, 1986, see section 151(a) of Pub. L. 99–514, set out as a note under section 1 of this title.

Effective Date

of 1982 AmendmentAmendment by Pub. L. 97–354 applicable to taxable years beginning after Dec. 31, 1982, see section 6(a) of Pub. L. 97–354, set out as an

Effective Date

note under section 1361 of this title.

Effective Date

of 1976 Amendment Pub. L. 94–455, title II, § 214(c), Oct. 4, 1976, 90 Stat. 1549, provided that: “The

Amendments

made by this section [amending this section and section 6212 of this title] shall apply with respect to taxable years beginning after December 31, 1969; except that such

Amendments

shall not apply to any taxable year ending before the date of the enactment of this Act [Oct. 4, 1976] with respect to which the period for assessing a deficiency has expired before such date of enactment.”

Effective Date

of 1971 Amendment Pub. L. 92–178, title III, § 311(b), Dec. 10, 1971, 85 Stat. 526, provided that: “The amendment made by subsection (a) [amending this section] shall apply to taxable years beginning after December 31, 1969.”

Effective Date

Pub. L. 91–172, title II, § 213(d), Dec. 30, 1969, 83 Stat. 572, provided that: “The

Amendments

made by this section [enacting this section, amending section 6504 of this title, and repealing section 270 of this title] shall apply to taxable years beginning after December 31, 1969.”

§183 Activities Not Engaged in for Profit

Summary

Title 26, §183

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