When Rodeo Winnings Meet the IRS: Hobby vs. Business Test
A man who won $50,000 at rodeos after claiming Social Security faced IRS scrutiny over whether his riding was a hobby or taxable business.
Few tax disputes capture the tension between passion and profit quite like the case of a rodeo competitor who collected $50,000 in winnings after filing for Social Security benefits — only to find the IRS questioning whether his saddle time constituted a legitimate business or simply a recreational pursuit. The distinction carries enormous financial consequences, since hobby losses cannot be deducted against other income under current tax law, while a bona fide business can offset expenses and reduce a taxpayer's overall liability.
The IRS applies a multi-factor test to determine which side of that line an activity falls on. Regulators examine whether the taxpayer depends on the income for their livelihood, conducts the activity in a businesslike manner, devotes significant time and effort to it, and has turned a profit in at least three of the previous five tax years. For a retiree already drawing Social Security, demonstrating genuine profit motive — rather than the pursuit of a lifelong passion — becomes a considerably harder argument to make.
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The case underscores a broader challenge facing Americans who monetize personal interests later in life, whether through competitive sports, crafts, or side ventures. The IRS hobby-loss rules, codified under Section 183 of the tax code, were specifically designed to prevent taxpayers from sheltering ordinary income behind activities that function more like expensive pastimes than real enterprises. Yet the line between devotion and livelihood is rarely clean, particularly in niche pursuits like rodeo where winnings can be substantial even if irregular.
For retirees and gig workers alike, the practical lesson is straightforward: meticulous record-keeping, separate business bank accounts, and evidence of a consistent profit-seeking strategy are the building blocks of a defensible business classification. Without them, the IRS holds considerable leverage to reclassify income and deny deductions, potentially triggering back taxes, penalties, and interest on years of returns.
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