Avoiding reporting another business loss

[hillite]

In 2014 I started a woodworking business as a single member LLC.  The startup has been very slow and I haven't yet reported positive business income.  (I have been taking measures to be able to demonstrate that I am engaged in this activity as a business activity and not mere a hobby should I ever need to substantiate that.)  The losses involved are very small so far:  last year was the largest at $7,000 (when I started renting shop space) while all prior years were less than half that.  But I'm eager to show positive business income in 2020.

If I were to take all the deductions I'm entitled to for 2020 I would once again report a loss.  So I'm looking at forgoing most of my deductions, but not all, in order to preserve positive business income.  My question is:  Can I defer placing into service tools and machinery purchased in 2020 to a future year so I don't lose the tax value of a deduction?

For context, here's how I handle tools and machinery.  These practices were established after consulting with a CPA a few years ago.

- I purchase them with my personal funds, not with business funds.  (In fact, I had already acquired a lot of them prior to starting the business when this activity was merely a hobby.  So in 2014, there was a large group of items placed into service, many of which had been purchased years before.)  In future years I expect this will change as my business becomes profitable, but for now this is my practice.

- I buy the vast majority of my items used (garage sales, auctions, Craigslist, etc.).  I treat each year's purchases as a single asset (eg, 2018 Tools and Machines, 2019 Tools and Machines, etc.) for tax purposes.  Again, we're talking relatively small potatoes.

- In 2017 I adopted a capitalization policy whereby any tool or machine purchased for $50 or less is expensed and not capitalized.

Given all that, the question can be restated more specifically:  For tools and machines (ie, those that cost more than $50 and are therefore depreciable) that were purchased in 2020, can I wait until 2021 to consider them placed in service and therefore begin depreciating them then? 

If so, I will claim other deductions for other purchases (eg, supplies, vehicle expenses, contract labor) that I assume can only be taken in the year in which the cost was incurred and save this one for a future, more prosperous tax year when it still has value.

[ColeenD3]

You already have a hobby. Your hobby began in 2014 and has never reached the level of a business. While other factors come into play, they are not sufficient to overcome a 7 year time span of losses.

There's no way to tell a legitimate business from a hobby except by using a general rule of thumb: If a business reports a net profit in at least three out of five years, the IRS presumes that it's a for-profit business. If a business reports a net loss in more than two out of five years, it's presumed to be a not-for-profit hobby.

This rule places a huge burden of proof on young businesses. On the one hand, the IRS expects new businesses to incur a loss. It's normal for a business to have a year or two of losses before becoming profitable. On the other hand, it can potentially disqualify you from claiming a business expense deduction.

If you buy an asset, it is a personal asset until it is placed in service in your, at this point, profitable business. You will be able to take depreciation on your assets. Anything else you have purchased or rent you have paid, is a personal expense. These can't be postponed to take an expense when your business starts to show a profit.