@Daniel_284 wrote:
Thanks. Perhaps I'm overly concerned about the 3-of-5 rule. The business is expected to be profitable, but whether that happens in year 3 is uncertain, in part because year 1 consisted only of a December. Perhaps better to keep everything accurately documented and deducted and be prepared to defend its business status if needed.
Your Section 179 note is also a good reminder, thank you.
The hobby loss rule is a rebuttable presumption. If you can show by facts and circumstances that you really are actively engaged in ongoing business activities with a profit motive, you should survive any audit. For example, in high school, my friend's Dad was running a "catering business" from his home, but it was really a hobby that he used to write off the purchase of fancy kitchen equipment for himself, and he had to show a profit every once in a while. (Obviously, being 14 at the time, I was not in a position to object.) On the other hand, I doubt the IRS questioned the ongoing losses of amazon.com in its early days. If audited, you would show by facts and circumstances that it really was a business with a profit motive.
I can't cite a specific regulation but I also believe that it is improper to fail to report expenses if that gains you a benefit you would not otherwise be entitled to. The most obvious example is the earned income credit, where omitting legitimate expenses to create a profit could result in receiving more EIC than you pay in higher taxes. Another example would be omitting expenses to show a higher profit for purposes of qualifying for a loan of some kind.
