Does anyone know how many years a corporation has to turn a profit?  Is it 2, 3, or something like 3 of the first 5?

I don't know if there is a limit for a [u]corporation[/u] or not.

For individuals, the issue is called "hobby loss"

My understanding is that you had to turn a profit in at least 3 of the first 5 years.  Don't forget it doesn't say how MUCH profit.  One year my S Corp made a profit of
$49.

Maddog50, look at Internal Revenue Code Section 183.  It states that you are allowed to deduct losses from transactions to make [i]profit[/i], but not deductions for losses incurred to pursue [i]hobbies[/i] (except to offset any income derived from the activity in question).  If you made an effort to make a profit, then you should be ok.  Of course, if any three out of the last five consecutive years you make a profit, you are fine.

I've heard about that requirement for years, but I've never seen it enforced.   I have yet to work with a business that made a profit.  I've done accounting work on and off (mainly the computer-end) for over 30 years, and again, if it was a requirement, the IRS would have shutdown every single one of my customers and my employers during that time.  My current employer has been in business for over 15 years and has yet to make a profit. (I'm not repeating anything the owner doesn't state publicly)  The first company I did accounting for didn't make money for over 15 consecutive years.  It was one of the largest employers in the state, and I couldn't imagine the IRS auditing the corporation and claiming it wasn't a business.

Well, enough discussion.  Here's the law [url]www4.law.cornell.edu/uscode/26/183.html[/url].z

Thanks.  That's some good info.

I think the restriction is only on a Sole Proprietor (possibly an S Corp), the reason being that a C Corp's losses do not flow down to your individual tax return but may only carry forward to offset profits in subsequent years.  

zoom has this deal right.

In the past some folks farmed - on the side - to generate losses.  The IRS put in some restrictions that eventually a business/farm must be profitable or be considered a hobby.

SNorman wrote:


True.  From section 183 (click on the link I gave), "In the case of an activity engaged in by an individual or an S corporation..."

5subslr5 wrote:

I just had to meet with a CPA to ask a couple of questions about my employer's tax return (on April 15!  I'll probably get it by the post office tonight with only an hour to spare), so I just asked a CPA if the IRS has doing anything different lately in regard to this rule since my employer is affected by it.  He said that from what he has seen, the IRS doesn't normally use it as a reason to audit.  They use it as a reason to put additional pressure on someone after they find other things they don't like on their return.  Aside, sounds like the relationship between assault weapon features and its prosecution.  He also said the IRS almost never goes after farmers, because they are "sacred cows," and if they didn't 3/4 of the farmers in the country would be hit by this since that many of them never show a profit.  In some states, a farm can not legally be owned by a C corp, so there is no way to protect yourself from this burden.  He said you really only have to worry about this rule if you list either the word "painter" or "photographer" on your tax return.  He said the IRS has gotten smart when it comes to housewives trying to expense art classes or amateur photographers trying to expense expensive equipment.z