An individual who conducts an activity as a for-profit business is allowed to deduct expense that are ordinary and necessary in carrying on the trade or business (IRC SEC 162). Losses are deductible. However, if a loss is attributable to an activity not engaged in for profit (a hobby) the loss, if any, is not allowed as a deduction (IRC SEC 183).
an activity is presumed to be a for-profit business if there is net income for three or more out of five consecutive years. Taxpayers can elect to delay a determination of profit motive until the fifth taxable year. If three profitable years have been realized by that time, losses may be allowed for prior years. To make the election, a waiver of the statute of limitations must be signed, allowing the IRS to assess deficiencies. The election is made on form 5213.
even though the activity an activity has met the three-out-of-five years profit test, the IRS can challenge the profit motive presumption if the facts indicate the activity is not a business (for example small profits in some years while large losses in others)
see reg 1.183-2(b) for facts and circumstances used by the IRS
https://www.law.cornell.edu/cfr/text/26/1.183-2
no one factor is determinative. that's why a discussion with a tax pro is warranted unless you conceded your activity is a hobby.
if it's a hobby your income is taxable but none of your expenses are deductible for Federal income tax purposes. this income is not subject to self-employment tax. some states may allow the deductions.
if it's a business all your expenses mentioned are deductible and you report on schedule C. Any net income is subject to self-employment taxes.
