This will be the 3rd year in a row that my business is operating at a loss. My business is horse training. I purchased a horse 2 years ago as an investment, knowing I will be training it for a few years before it will be ready to be sold for profit. So far 2 years I have claimed the loss, with the intent to claim this 3rd year at a loss aswell. How many more years do I have to claim a loss before it could be considered a hobbie/ Audit? I heard that for horse training you have to show profit in 2 out of 7 years.. does that mean I can show a loss 5 years in a row- at worst case scenerio before a profit?"
You are correct on the two out of seven years for horse training. However,technically, there is no limit on the years you can claim a hobby loss. However, if the activity has profits in three of five consecutive years (or two out of seven for horse training, as you note), the IRS would consider it a business. If not, it may presume that it is a not for profit activity (a hobby) and attempt to deny the losses. The taxpayer can still attempt to show that considering the overall facts, it is a bona fide business.
See http://www.irs.gov/irs/article/0,,id=186056,00.html for the IRS's definition of Hobby Losses.
If you consider it a business and treat it as a business, go ahead and claim the losses.
You are correct on the two out of seven years for horse training. However,technically, there is no limit on the years you can claim a hobby loss. However, if the activity has profits in three of five consecutive years (or two out of seven for horse training, as you note), the IRS would consider it a business. If not, it may presume that it is a not for profit activity (a hobby) and attempt to deny the losses. The taxpayer can still attempt to show that considering the overall facts, it is a bona fide business.
See http://www.irs.gov/irs/article/0,,id=186056,00.html for the IRS's definition of Hobby Losses.
If you consider it a business and treat it as a business, go ahead and claim the losses.