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.

Form 5213, Election To Postpone Determination as To Whether the Presumption Applies that an Activity Is Engaged in for Profit

The file is in Adobe portable document format (PDF), which requires the use of Adobe Acrobat Reader.

To get a free version of Adobe Acrobat Reader software, go to the Adobe web site.

For more information, see our discussion of presumption of profit motive.

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