Purchased sailboat in 2015. Contracted to charter company splitting income. First 2 years expenses exceed income. IRS expects profit 3 of 5 years. Any ideas?

[hathonl]

In tax years 2015 and 2016 depreciation and expenses exceeded charter income causing a loss 2 years in a row. Expenses exceed income again in 2017 but IRS wants to see a profit for 3 of 5 years or lose business status and become a hobby. Should I declare a loss again and wait for IRS audit?  Income was overestimated in my business model.

[AnnetteB · Accepted solution]

The determination of “profit for 3 out of 5 years” is not as black and white as it sounds.  Other factors can be taken into account.

Certain things such as the amount of loss, the profit motive, whether you have the business experience and knowledge to be able to operate in a businesslike manner to profit from the activity, the amount of time spent operating the business, whether you have other sources of income, etc. must be considered.  Also, some businesses simply take more time to get off the ground to make a profit.  These are things that you need to consider yourself as you decide whether to continue to move forward as a business or convert it to a hobby. 

For example, if you have a full-time job and operate the business on the side, then continuing to report a loss (especially if it is a significant one compared to your other income) would make the business appear more like a hobby. 

Only you can see the whole picture for your business to decide whether it is time to change to a hobby or continue as a business, but claiming a loss for the third year in a row should not be the only determining factor.