A recent Tax Court case is a reminder why you don't want your farm to be a hobby.
Under the rules in effect through 2017, if your business was determined to be a hobby required you to still report the income, however, you could only offset expenses to the extent of income. After 2017, you can no longer deduct any hobby expenses against that income, so it is very important not to be considered a hobby.
Mrs. Donghue's grandfather was a successful breeder of race horses and she established a "virtual" farm to grow and race horses starting in 1985. However, they stopped racing horses in 2008 (and never made more than $100,000 from racing horses from 1985-2008) and the IRS audited their 2010-2012 tax return. They reported losses of about $30,000 which were disallowed and the IRS assessed penalties of about $6,000.
As we have described in previous posts there are 9 factors that the IRS considers in any hobby case. We won't recap all 9, but simply indicate the court found that 8 of them were in favor of the IRS and one was neutral. None of them were in favor of the taxpayers.
Typically, we would not find this type of case going to Tax Court, however, likely the taxpayers wanted to get the penalties waived. The Tax Court still found in favor of the IRS and upheld the penalties. This ended up being an expensive "hobby" for the taxpayers.