The Internal Revenue Service looks at unprofitable businesses with a doubtful eye. The laws and regulations, however, do not provide a specific definition of what constitutes a trade or business because no single definition can apply to all cases. Generally, a trade or business must be an activity that is carried on with a profit motive and have economic activity conducted. The problem is that the "burden-of-proof" is the business owner's.
There are several key factors the IRS considers in determining whether activities are engaged in for a profit. Some of those criteria are: it must be done in a business-like manner similar to other activities of the same nature that operate profitably; the expertise of the business owner; time and effort toward the business; relying on profits from the business for personal living expenses is also an indicator; start up losses may be present and do not control distinction, but continued losses without any attempts to improve or correct the business might indicate you are not engaged in it for a profit.
There must be a good faith objective and expectation of making a profit to have the business taxed as such. If your business is struggling—seek advice, consider its effect on your business's profitability and if you think it will make your business more profitable, why not implement the changes. It will help support your argument that you are in BUSINESS and it is not a HOBBY.
Leonard Holler, CPA, CVA, Regional Director for the Wyoming Small Business Development Centers in Casper.