When a Business Looks Like a Hobby: Tax Court Disallows Ranch Losses!

Taxpayers who are in business to make a profit can generally deduct related expenses. The burden of proving a profit motive is on the taxpayer. Otherwise, the IRS might deem the activity to be a hobby and deductions may be limited. One married couple reported large losses year after year on their tax returns, based on their ranch where many activities took place, including horse boarding, pecan farming and crabbing. The U.S. Tax Court found no evidence that the activities were organized to be profitable. Recordkeeping was inadequate, and operations weren’t businesslike. There were no efforts to improve profitability. Deductions were disallowed and penalties were imposed. (TC Memo 2025-95)