What if my business keeps seeing losses?

[bhuether]

I am retired and live off retirement income. I live in 2 story home where 2nd story is completely for a music studio (separately rented), where I teach music lessons. I don't make much teaching. But since the rent is several thousand, and since I have been spending several thousand a year over past two years on marketing (I am trying to ramp up to be able to teach online courses and not just one on one lessons in the studio), that means I am continually reporting loss of several thousand. I am not sure when I am going to see the results of my marketing efforts to be able to sell online courses. In the meantime these losses don't impact my ability to live since my retirement income is enough for living space rent and music studio rent, as well as business expenses.

Anyway, just curious if there is some fine line here. Seems I could indefinitely have these sorts of losses and just curious how IRS views such a situation.

thanks

[AnnetteB6 · Accepted solution]

The rule of thumb that is often used to gauge whether a business is truly a business in the eyes of the IRS or if it is a hobby is whether it makes a profit in 3 out of 5 years.  Of course, that is only a guideline and not a rule.  Any business that is just starting out is bound to have some difficult years where there are losses to report instead of income.  It is only when major losses continue to be claimed year after year that you should be concerned.  If the losses are diminishing as your income is growing but just not profitable, that is bound to be taken into account if your return is examined.

Things are not always black and white and many factors would come into play to determine if your business is truly a business and not a hobby.

Here are a couple of resources from the IRS that may help you as well.  

How do you distinguish between a business and a hobby?

Hobby or Business -- IRS Offers Tips to Decide