My business lost money. Will the IRS treat it as a hobby?
Short answer
A creator business that loses money isn't automatically a hobby. The IRS looks at whether you run it like a business trying to make a profit, and a business that shows a profit in at least 3 of 5 years is generally presumed to be one.
Otavio Mayole, Co-founder, DeCypher FinancialsUpdated
Why it matters: business losses can lower your other income, like a W-2 salary. If the IRS decides it's a hobby, you still pay tax on the income, but you generally can't deduct the expenses.
What the IRS weighs:
- Whether you run it like a business, with separate accounts and real books
- The time and effort you put in
- Your expertise, or the advisers you rely on
- Your history of income and losses, and whether you're changing things to become profitable
- How much personal enjoyment is involved
How to make it clear you're a business:
- Separate business and personal money.
- Keep weekly books and a monthly profit and loss.
- Write down your plan to grow revenue, and act on it.
- Pitch brands, track results and adjust.
A first year or two of losses while you invest in equipment is normal. Years of losses with no plan to change are what draw attention.