I lose money on my business every year. Is there a problem showing a business loss year after year?

Answer: If a business never makes money, the IRS can disqualify it as a proper business and consider it a hobby. If this happens, the ability to deduct losses is greatly reduced. Generally speaking, a business that loses money three years in a row is likely to be considered a hobby.

Example: A taxpayer starts a business in 2003. The business is slow to take off and the taxpayer loses money in 2003 and 2004. In 2005 the taxpayer should make at least a small profit to avoid the IRS labeling his business a hobby.