Profit Motive: You're OK as long as you want to make a buck.

Chris thanked me for the Designers Dozen: Tax Saving Tips for the Graphic Artist post and then asked:
I recall that your new business can only lose money for a certain period of time before it's a hobby. Is that still true and if so, how long is that?

There is no time limit on losing money. That's hogwash! Never was a rule, an old husbands' tale, maybe. For a better understanding, think of it in reverse: If your business makes a profit in three out of five years you're home free. Notice that says that IF you make a profit not that you MUST make a profit.

As long as your goal is to make money, you're OK. The IRS says that in order for you to be engaged in a business rather than a hobby, the goal must be to make a profit. The IRS doesn't insist that you actually make a profit, but there must be a reasonable expectation of one.

How do you prove you're in it to make money if you're not making any money? That's too long to go into here but the full explanation is in my book, Self-employed Tax Solutions -- starts on page 11 with Cheech and Chong as the solo entrepreneur example.