When the Treasury Department finalized Section 1.183-2 in 1972, it wanted to police wealthy taxpayers using gentleman farms, horse-breeding operations, and similar prestige ventures to generate paper losses against W-2 income. To do this, it set up a nine-factor test that distinguished a hobby from a trade or business for tax purposes.
These factors are the same framework that examiners today are applying to YouTubers, Twitch streamers, TikTok creators, and the digital ventures that surround them.
The fit is poor, but not hopeless. Two US Tax Court decisions show what determines the outcome when the test meets digital, intangible-asset activity: paperwork.
Two Cases, One Judge
In Sherman v. Commissioner, emergency-room physician Joseph Sherman deducted more than $100,000 in expenses for a music-and-film website, digital-assets venture, and blog. For the tax year at issue, the site produced no revenue. Sherman had no business plan, records, licensed entity, substantiated expenses, or evidence his camera equipment wouldn’t keep depreciating.
All nine factors weighed against the taxpayer. Judge Courtney Jones put it bluntly in her 2023 opinion: “This is not a difficult case.”
Jones, however, reached the opposite conclusion on substantially similar facts in Sullivan v. Commissioner earlier this year. James Sullivan spent six years developing a software application addressing pornography addiction, first through machine learning, then manually drafted scripts, then donation-based monetization, then a $9.99-per-month subscription. Between 2013 and 2019, the company generated zero revenue, and Sullivan kept his executive-level day job throughout.
The Tax Court in Sullivan found profit motive across all years at issue, crediting Sullivan’s business plan, hired employees, customer surveys, IP-protection agreements, separate ledgers and bank accounts, paid advertising, and documented pivots between monetization strategies.
The court accepted five years as a reasonable startup period for a software venture and expressly credited Sullivan’s “reasonable business decisions to adopt new ideas for the company and to entirely shelve its development at times he felt it had no profitable outlook” as consistent with profit motive.
The difference between the two cases was that Sullivan had a written business plan, separate ledgers and bank accounts, paid employees on a payroll system, IP-protection agreements, and a documented sequence of monetization strategies he had abandoned in response to user data.
The Mismatch
The outcomes of Sherman and Sullivan aren’t surprising. The Nixon-era regulation was drafted to flesh out a statute aimed at gentleman farms and horse operations, and the factors reflect that focus. The government looks for tangible assets, year-over-year continuity in the same line of work, identifiable industry peers, and conventional bookkeeping.
Creator-economy activity violates each assumption. Channels and audiences are intangible. The regulation has no clean way of evaluating a travel vlogger who pivots to finance content.
Personal enjoyment is treated as evidence against profit motive, even though durability through enjoyment is all that gets a creator across the two-to-three-year ramp required to clear platform monetization gates. These include 1,000 subscribers and 4,000 watch hours for YouTube and 2,000 active followers and at least 5 million organic impressions within three months for X.
Until recently, an unfavorable Section 183 determination was painful, but partially recoverable. Hobby expenses traveled below the line as miscellaneous itemized deductions and produced some 2%-floored deductibility. The US Court of Appeals for the 11th Circuit confirmed that classification in Gregory v. Commissioner, finding Section183(b)(2) deductions are miscellaneous itemized deductions.
The Tax Cuts and Jobs Act’s blanket suspension of those deductions was scheduled to sunset at the end of last year, but the tax package signed in July 2025 made it permanent.
While a horse operation may have generated the exact evidence that Section 1.183-2 was built to evaluate, a YouTube video creator won’t—unless a practitioner builds a Sullivan-style record around it.
The Practical Playbook
Based on Sullivan, practitioners can take three concrete steps to build a record the nine-factor test rewards:
A written business plan, even if it comes late in the activity. Sullivan didn’t produce a written plan until 2019, six years after the activity began. The Tax Court credited it anyway, citing Annuzzi v. Commissioner for the proposition that a formal written plan doesn’t determine if the taxpayer “had some form of business plan and pursued it consistently.”
For a content creator, the plan should tie to platform monetization mechanics: subscriber or follower thresholds, ad-revenue eligibility, sponsorship qualification, and the revenue model after each gate is cleared. A plan generated in year three is far better than no plan and is more credible than one made after a notice of deficiency arrives.
Separate financial infrastructure, even if compliance is imperfect. Sullivan maintained a general ledger and a separate bank account for the venture throughout the years at issue, but transferred funds between business and personal accounts and occasionally charged business expenses to a personal credit card. The court treated these as minor blemishes because the underlying separation existed.
Sherman had no comparable infrastructure, and the court treated the commingling in his case as evidence the activity wasn’t operated in a businesslike manner. For a creator, that means a dedicated business bank account, books, and records that are kept separate from personal finances. Some commingling is survivable; the complete absence of separation isn’t.
Contemporaneous documentation of every pivot. The Sullivan court stated that reasonable business changes are consistent with profit motive. For creators, who pivot more often and more visibly than software developers, the equivalent record can be a contemporaneous file documenting the business logic behind each change—for example, engagement data, monetization analysis, audience feedback, market research.
The nine-factor test wasn’t built for creator-economy activity, but Sullivan shows it can be applied to it favorably. Getting there means building the record while the activity is still operating, not reconstructing it at audit.
After last year’s tax package, doing the work late may be the same as not doing it at all.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.
Author Information
Josh Hamlet is the founder of Clarity Tax Counsel PLLC, a tax law firm representing content creators, professional gamblers, cannabis operators, and other clients in high-scrutiny industries.
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