Want to know a perennial IRS audit red flag? Claiming large hobby losses on Schedule C. IRS is on the hunt for taxpayers who year after year report large losses from hobby-sounding activities on Schedule C or F of the 1040 to help offset wages, business or investment earnings, or other income.
Revenue you collect from a hobby is taxable, reported as other income on Schedule 1 of the 1040. But you cannot deduct the related expenses. Before 2018, itemizers could deduct hobby expenses, up to the amount of their reported hobby income, as a miscellaneous deduction on Schedule A, and only to the extent that the total of all miscellaneous itemizations exceeded 2% of adjusted gross income. The 2017 tax law temporarily nixed through 2025 most miscellaneous itemizations, and last year’s “One Big Beautiful Bill” permanently ended this tax write-off.
To deduct a Schedule C loss, you must show the activity is a business. It needs to be conducted with continuity and regularity in a businesslike manner, and you must have a reasonable, good-faith objective in making a profit from it. IRS regulations provide a safe harbor. If your activity generates a profit in three out of five consecutive years, or two out of seven years for horse breeding, the law presumes you’re in business to make a profit unless IRS establishes otherwise.
Trump account contributions won’t trigger the filing of a gift tax return, IRS says. Trump Accounts are a new type of tax-advantaged savings account for young children who are under age 18 and who have a Social Security number. The federal government will put $1,000 in each Trump Account set up for children born after 2024 and before 2029. This is a one-time payin, and parents must opt in. Up to $5,000 of additional money can be contributed to a Trump Account each year by parents, etc. Tax pros had concerns that individual donors, such as parents, must file gift tax returns on Form 709 when they contribute funds to a Trump Account. They asked IRS for guidance on this issue, and IRS has now provided it. Parents, grandparents and the like won’t have to file Form 709, provided they meet the rules in a helpful safe harbor that the Service set forth in Revenue Procedure 2026-25.
Gambling:Take note of these two gambling-related tax changes that kicked in this year. The first involves deducting gambling losses. Beginning with 2026 returns filed next year, only 90% of gambling losses can be claimed by itemizers on Schedule A of the 1040, and only to the extent of winnings reported by the taxpayer on Schedule 1.
Second, casinos have a higher W-2G threshold for reporting winnings. Starting with 2026 forms sent out in 2027, casinos must file Form W-2G with IRS for each person who wins $2,000 or more in bingo, keno or playing the slots. This $2,000 figure will be adjusted annually for inflation. The prior thresholds for reporting gambling winnings were $1,200 for bingo and slots and $1,500 for keno. The Service issued proposed regulations covering both of these changes.
In Congress: the Tax Relief for Fraud Victims Act would allow victims of fraud or theft to deduct personal losses if they itemize. The bill also gives retirement account relief. The AI Tax Integrity Act would require IRS to establish a pilot program that uses artificial intelligence to identify improperly filed federal tax returns.
Business Taxes: IRS drives up the standard mileage allowance for business vehicle usage. The rate will be 76¢ a mile for the final six months of 2026, a 3.5¢ hike. The Service raised the rate due to the steep gas prices at the pump this year. The mileage rate for medical travel and military moves increases by 3¢ to 23.5¢ a mile. The 14¢-a-mile charitable driving rate is set by law and doesn’t change.
Claiming deductions on your 1040 for carryover of net operating losses (NOL)? Follow the rules for substantiating the write-off. If challenged on audit, you will be asked to prove both the original existence of the NOL and the amount you carried forward to each year. Failure to do this may cause IRS to ax your write-off. You cannot rely solely on your prior-year returns to prove the existence of the NOL.