The IRS allows you to take a tax deduction for legitimate losses incurred in the operation of your business. However, if your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business. If the IRS classifies your business as a hobby, you’ll have to prove that you had a valid profit motive if you want to claim those deductions. Running a hobby as a business could very possibly trigger an IRS audit. If your business is legitimate, keeping accurate and extensive records could help prevent the classification of your business as a hobby. In addition, a written business plan is often a prerequisite for indicating intent for profit, and it can also show ways in which you are modifying your business to cope with losses.
For more information on small business taxes or hobby business tax rules, contact a Nevada Corporate Headquarters representative at 1-800-508-1729.