It depends. The IRS' standard is that if you are in business, you should reasonably be expected to be profitable over the course of a period of time. Businesses can and do have down years. But the general pattern is that they will usually make money. If someone is claiming loss year after year, the IRS can and many times will question if the "business" is truly a business or if it is a hobby, which is generally a not-for-profit activity. If they determine on the merits that the "business" is actually a hobby, then they will reclassify the "business", which means that income generated is treated as ordinary, non-business income (not subject to Social Security/Medicare or self-employment taxes). On the other hand, under current tax law, deductions against this type of income is simply not allowed.
What the IRS will look at, though are facts and circumstances of the case. Certain circumstances may well be legitimate business operations that are producing loss year over year, and this can especially be the case with farming. If a farm is not able to produce because of severe drought, for example, or catastrophic loss of livestock, or upheavals in the commodities market, there could very well be losses several years running. In these cases, the IRS may delve into whether employees (if any) were being compensated fairly (not overpaid for their services for the purpose of claiming loss), whether the farm is set up for commercial-type production (instead of a large family farm that might sell some products at the local farmer's market, for example), and other factors.
For a more detailed consideration of this subject, please see the following website: Earning side income: Is it a hobby or a business?
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
