Hi Itemizer,
I am assuming that you expect to be profitable in the future.
There is no limit on the number of years you can deduct net business losses.
Since you have reported losses for at least 3 of the past 5 years, you no longer have the presumption that this is a business. This presumption can be overcome.
At a minimum, you will need:
1. A business plan
2. Some realistic expectation of being profitable in the future
3. To keep records that a business owner will need to make decisions and report income accurately.
What business you are in also matters. You will probably not pass an audit if you are trying to be a professional golfer. Many people have golf as a hobby and treat it as entertainment. If your business is garbage collection, you are much more likely to pass an audit. Very few people view garbage collection as pleasurable.
In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
You carry on the activity in a businesslike manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on the income for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years, and
You can expect to make a future profit from the appreciation of the assets used in the activity.
Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the deductions.
I’ve included a link to the IRS website for your reference:
http://www.irs.gov/publications/p535/ch01.html
I hope this resolves your question. If you need further help with this
issue, please respond to this post.
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