The hobby loss rule is the IRS standard under Internal Revenue Code Section 183 that denies business deductions to an activity not engaged in for profit, treating the activity's income as taxable while disallowing the activity's expenses.
The IRS weighs nine factors from Treas. Reg. 1.183-2(b) — how businesslike your books are, your expertise, time and effort, history of income and losses, occasional profits, your other income, asset appreciation, prior success, and how much personal pleasure you get out of it. No single factor decides it. IRC 183(d) gives a presumption of profit motive if the activity turns a profit in three of five consecutive tax years; the two-of-seven rule covers horse activities, not race cars. In Avery, T.C. Memo. 2023-18, an attorney lost $303,366 of car and racing costs claimed as law-firm advertising — $167,027 unsubstantiated, the rest not ordinary and necessary under IRC 162 — not under Section 183. This is general education, not tax advice — take your own situation to a tax professional.
Land on the hobby side and your winnings are still taxable while your engine bill, tires and tow costs deduct nothing — the worst of both columns.
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Is Your Racing a Business or a Hobby? The IRS Rules Racers Need to Know