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An activity is presumed to be engaged in for profit and not to be a hobby, if it is profitable in three out of five consecutive years. For a new business, this means that you don't have to show a profit for your first two years.
The IRS does provide a form (Form 5213) on which you can officially elect to have the IRS wait until the first five years are up before examining the profitability of your business. If you use this form, it should be filed within three years of the due date of the return for your first year in business.
The file is in Adobe portable document format (PDF), which requires the use of Adobe Acrobat Reader.
Adobe Acrobat Reader is available, without charge, at the Adobe website.
For more information, see our discussion of presumption of profit motive.
After you finish your federal tax return, your information will accurately and automatically transfer into your state return. Just answer a few state specific questions, and you're done.
CompleteTax State is only $34.95 and includes: