I read this misinformation on an unnamed blog recently:
To prove that your blog or any business is a legitimate business then you must make a profit 3 out of 5 years that you are in business.
That’s a common misunderstanding of the IRS rules.
What the IRS states is this:
“An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.”
The IRS is saying if you make a profit, you’re a business.
But logic rules tell us that the converse of a statement is not necessarily true.
The IRS is NOT saying you must show a profit or else you’ll be considered a hobby. They are stating that if you do show a profit, you will be considered a business, which is what you want. You want to be considered a business because being considered a hobby is very detrimental tax-wise.
A business can lose money every year and still be a legitimate business. Of course, the IRS and you may wonder if it is worthwhile to continue in a business that loses money every year, but it can happen.
Here’s a brief video clip explaining this hobby rule: http://taxesforwriters.com/video-blog-will-losses-mean-writing-is-a-hobby/
I hope that helps clarify a common misunderstanding.
Carol Topp, CPA