I've read many posts about the IRS considering the business a hobby if you don't make a profit after 3 years. When you talk about profit is that after all deductions?

yes

The answer to your question is yes, profit is after all deductions. However, your statement that prefaces your question is incorrect. Ok, technically it is correct, because there have indeed been many posts stating that if you don't have a profit in three years then your business could be considered a hobby by the IRS. And technically it is true, it possibly could be, but would most likely not be. The standard they apply "is it a viable business?" As long as you can prove your mystery shopping business is a viable business and not a hobby you should be good. And I can't imagine there would be many cases where that would not be difficult to prove at all.

Where this law applies is in cases such as the amateur photographer who starts a "photography business" in order to depreciate his ridiculously expensive camera equipment off his taxes. He really isn't a photographer, it's a hobby, but maybe he shoots a friend's wedding or some portraits once or twice a year. He makes $500 in fees and then claims $2000 in expenses on all those cameras and lenses. It's not a viable business. He does it because it's a hobby and therefor the IRS will reclassify it as such.

There are many, many legitimate businesses that would show a loss for several years. My father owns a mini storage company. I'm fairly certain he showed a loss in that business for years and years as he depreciated off the cost of the land and buildings, which he built at 3 different times. In the case mystery shopping, it's very easy to show that while your business might operate at a loss after expenses and mileage deduction it operates with positive cash flow, which makes it a viable business.



Edited 1 time(s). Last edit at 01/04/2015 12:38AM by bgriffin.

bgriffin thanks so much for that excellent explanation. It know makes sense to me. I was worried as this is my second year of MS shopping and indeed I made more money than I did last year, however by the time the expenses come off I will be operating at a loss. I do this part time in retirement but still work hard at making more money at what I do. My goal is to do better each year. Thanks again.