Your business with its records on all the expenses will need to be organized and verifiable. Just having a loss is not enough on its own. Needing to be able to show a profit-making motive and business plan to substantiate your deductions. Deductions without comparable income or verifiable potential income puts the deductions at risk and the entire amount disallowed as being just a hobby.
The IRS has many factors in considering if there is a business with actual deductions or a hobby with nondeductible losses. Some of the factors are
- Is the activity carried out in a business-like manner with complete and accurate books and records.
- The time and effort showing intent to make it profitable.
- The taxpayer depends on income from the activity for their livelihood.
- If there are personal motives for carrying out the activity.
- If the taxpayer has enough income from other activities to fund the operation.
- Losses are out of control or due to the type of business.
- There have been methods changed to improve profitability chances.
- There is the expectation of profit in future years.
All facts and issues need to be considered. With start up restaurant there would be expectation of profit seen in the first couple of years but a business raising racing horses could take close to 20 years. So it is not only the questions but also what might be considered comparable for the activity. Not showing a profit for a business tax return can raise questions and increase the risk to examination. At the same time if you have properly gone about setting up your business, it is ok to write off the business losses.
