Legitimate Home Based Businesses

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Question: Should I claim a loss on my home-based business?

For the past 3 years, I have been a consultant selling spa products via spa parties. The first two years resulted in a loss (after deductions). I have documentation that support my claims (mileage, business cards, website, catalogs, etc.). My concern is that I have read that if you claim a loss for 3/5 years, then the IRS can consider the business a hobby-business. 2006 would have been my 3rd year, and while I had some sales, they were very low as I became pregnant and didn't actively sell. I am still on active status for the company as I ordered products for my personal use, for which no money was made. My main question is, do I have to drop as a consultant from this company in order for it to seem as though I end this home-based business? . Or do I just claim the months I actively sold products?

Answer: You operate under a misconception about the rules by, in effect, reading them backwards. The rules essentially say that if you show a net profit after a certain number of years then you are presumed to be operating a legitimate, for profit business. This does not mean that if you don't show a profit you are presumed to be running a "sham" or hobby business.

If you do all the things businesses do (register with the state, get an EIN from the Feds, local business license, business bank accounts, file business returns, make efforts to sell your product, etc. etc.) then you can establish that you are a for profit business and your losses will be accepted regardless of how long they last.

If the above were not true then capitalists would not invest their money in start-up business.

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