regarding irs scrutiny of businesses vis a vis the 3 years out of 5 years profitability requirement to consider as a bona fide business endeavor and not a hobby use, does IRS calculate in depreciation, and financing costs of assets? Application is charter boat that is in a managed charter boat program...would irs insist on deducting depreciation to arrive at profitability? same with finance costs of the purchase of the boat?
Yes. If you were audited, and the IRS wanted to determine if the boat is a hobby or a business, everything is on the table. One of the key factors is, are you operating an ongoing trade. Are you seeking customers, are you advertising, are you engaging this activity regularly with a profit motive? When analyzing whether you have a profit motive, the IRS is definitely entitled to consider all your legitimate Business expenses, including financing and depreciation.