A hobby loss is the activity of an individual that includes hobby-type activities, such as quilting, woodworking, writing, traveling, that make some money but which the IRS views as merely hobbies. If the IRS feels the activity is a hobby rather than a business, it may disallow any expenses for the activity.
IRS guidelines for Hobby Loss include a list of factors they consider in making their determination.
One primary consideration is that the business is expected to make a profit in 3 out of 5 years. The IRS may send a notice to a business requesting more information. The business will need to file a Form 5213 in order to attempt to substantiate that the business is indeed legitimate and not just a hobby.