I had an interesting discussion with an Enrolled Agent. She has seen a great increase in IRS audits for schedule C’s. One thing they are looking for is whether your business is really a hobby or a business.
Hobby/biz example: My photograghy is a hobby (may change). I may occasionally sell a photo or 2, but I do it for fun, as such the few dollars I earn go into other income. I can’t write off all my camera equipment, software as business expenses.
But as I use my camera to make custom cards, promote my SendOutCards business, if I keep a log of how much business and how much personal, I can take off the biz portion on my schedule C.
Now a new business started at the end of the year may not have any sales that first year, but there should be sales of product/service in the following years.
Now if I later decide to turn my hobby into a business, that is allowed too.
The enrolled agent (passes IRS exam/similar status to CPA) said IRS questions whether it is really a business if no sales and no advertising/promotional expenses and no income. Now if you advertised and promoted, but no one bought (hopefully none of us would have that problem), it would still be a business, and you would find new ways of doing things. But if I opened up a store front, no advertising, not even as sign on the door, and talked to friends (non business discussions) and surfed the net all day, and no sales, the IRS would lean heavily towards it’s a hobby.
If ever in doubt what to do, talk to your tax advisor.
For IRS guidelines on hobby or business check out their discussion. I’ve always thought it to be a great reality check to go through the list, being honest with yourself, are you serious about your business, or is it just a hobby?