How long for profit?

[Bruce Wayne]

When you start a new business what is a realistic time frame before you reach profitability? 1 year? 3 years?

[terry1156]

It really depends on the business and the initial investment involved.

[jmjj215]

Internet businesses can turn profitable very quickly - within a matter of days. Others, like software and tech, could take years.

[VJW]

Originally Posted by Bruce Wayne

When you start a new business what is a realistic time frame before you reach profitability? 1 year? 3 years?

In the U.S., you MUST earn a profit from your declared activity in THREE out of the first FIVE years, otherwise they consider your activity merely a HOBBY, and you lose all your tax deductions (potentially retroactively, which would require repayment of back taxes).

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[dealsaver]

Originally Posted by VJW

In the U.S., you MUST earn a profit from your declared activity in THREE out of the first FIVE years, otherwise they consider your activity merely a HOBBY, and you lose all your tax deductions (potentially retroactively, which would require repayment of back taxes).

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So wrong it's not even funny. OP please don't take advice from an internet forum like this where any uninformed person can post, no matter how well meaning. If losses in a business continue for many years, this can be evidence that it is not an activity engaged in for profit. However, this is not necessarily a determining factor. Please visit IRS.gov for answers to your tax questions or see a tax professional.

[VJW]

Originally Posted by dealsaver

So wrong it's not even funny.

You most certainly are.

OP please don't take advice from an internet forum like this where any uninformed person can post, no matter how well meaning.

Your case in point.


As the IRS states:

“An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year.”

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[mom-from-missouri]

In that case, the major telecommunications company I work for, with over 200,000 employees world wide, is just a hobby....It hasn't had a "profit" in over 6 years....... Yet, it has managed to meet payroll, retire debt, sell and buy local telephone exchanges, sometimes paid a meger (very meger) dividend, although shares are only a 1/4 of what they were years ago.
I think there is a lot more to it than just making a profit.

[VJW]

The initial reference was to a business startup, not a large corporation. Obviously, different circumstances and different rules. Not to mention that nobody would confuse a “major telecommunications company” with a hobby.

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[jmjj215]

Let's just settle this by going to the evil source itself:

Not-for-Profit Activities

If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit.

The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

1. You carry on the activity in a businesslike manner,
2. The time and effort you put into the activity indicate you intend to make it profitable,
3. You depend on the income for your livelihood,
4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
5. You change your methods of operation in an attempt to improve profitability,
6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
7. You were successful in making a profit in similar activities in the past,
8. The activity makes a profit in some years, and
9. You can expect to make a future profit from the appreciation of the assets used in the activity.

Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. The activity must be substantially the same for each year within this period. You have a profit when the gross income from an activity exceeds the deductions.

If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death.

If your business or investment activity passes this 3- (or 2-) years-of-profit test, IRS will presume it is carried on for profit. This means the limits discussed here will not apply. You can take all your business deductions from the activity, even for the years that you have a loss. You can rely on this presumption unless the IRS later shows it to be invalid.

In Summary, VJW was talking about the presumption that the IRS must make if you have shown profit 3 of the past 5 years (or 2/7 w/ the whole breeding thing) that you are operating a business. If you've done that, you don't need to worry about the numbered stipulations cited above.

To the telecommunications deal, that issue is resolved w/ the bolded text. It doesn't apply to corporations.

Source: http://www.irs.gov/publications/p535/ch01.html#d0e809