Can a business take a loss every year?
How many years can a business take a loss before the IRS will not longer allow it?
1
525
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01/07/09 6:01am PST
Viewed by asker 01/15/09 8:32pm PST
Viewed by asker 01/15/09 8:32pm PST
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3 Replies
01/07/09 8:10am PST
The solution
From IRS Summertime Tax Tip 2008-12
An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).
If you are not sure whether you are running a business or simply enjoying a hobby, here are some of the factors you should consider:
Does the time and effort put into the activity indicate an intention to make a profit?
Do you depend on income from the activity?
If there are losses, are they due to circumstances beyond your control or did they occur in he start-up phase of the business?
Have you changed methods of operation to improve profitability.
Do you have the knowledge needed to carry on the activity as a successful business?
Have you made a profit in similar activities in the past?
Does the activity make a profit in some years?
Do you expect to make a profit in the future from the appreciation of assets used in the activity?
Here's the link for the rest of the text.
Happy Tax
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01/07/09 9:08am PST
Rebecca's answer is excellent. She did the research for you, but be sure to read the remainder of the cite she gave.
One more point: The 3 out of 5 rule is the IRS' published very general guideline. It's purely a starting point for an assessment of whether a venture is a business or a hobby. That doesn't mean you can take hobby losses so long as you concoct a slight profit in some years. But it also doesn't mean that you're sunk if a bona fide business loses money year after year. (Look at the airlines. I don't think they've ever made money. They stay in perpetual bankruptcy.)
The point is that the general guidelines can be overcome if it's a legitimate venture in the pursuit of profit. Some people pick the wrong business, the wrong time, the wrong place, the wrong product, the wrong sales technique, the wrong employees, or whatever. Some people are just lousy business owners. That doesn't mean that they weren't trying to make a profit and so are entitled to write off their expenses. Court decisions do not place an abundance of emphasis on the 3 out of 5 rule. It's what's known as a rebuttable presumption.
