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Comment by xyzzy_plugh | Hacker News Reader

Generally businesses have to eventually make money. At least, that's how it works in most of the world. If you constantly claim business expenses and only ever see losses, eventually you'll run afoul of the "expectations of profit".

Most people's hobbies will never turn a profit -- that's why they are hobbies, after all.

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Which is why you don't make losses; you just don't make much of a taxable profit after costs. (I am not an accountant.) I did this for a number of years with a little side software business. The business paid for the expenses associated directly with the business, but also computer/office stuff I might have bought anyway. The business turned a profit every year. Just not much of one.

But that's much, much easier said than done. What if your hobby is ceramics or 3d printing or painting or craft cocktails or homebrewing or repairing old cars or gardening...

Well, yes, you have to make enough money off your hobby that you have revenue to offset costs against. Which may be possible with art of various kinds but, then, you may not care enough about the money to bother going through the effort of selling at craft fairs or whatever.

3d printer is 10k. Out of pocket it would be $10k plus income tax $5k plus $1k VAT.

So you form "3d printing shop" company and put some money in (loan, services...). Company purchases 3d printer, but does not pay any taxes on printer, it is an expense. After a few years 3d printer is out of warranty but still functional, can be purchased from company for $1.

Difference $5999. Obviously this is not advice, consult your accountant first.

In reality it is bit more complex. But this is rough picture.

> So you form "3d printing shop" company and put some money in (loan, services...). Company purchases 3d printer, but does not pay any taxes on printer, it is an expense.

But you already paid the 5k in Income Tax, when you initially earned the 10k that you put in the company to buy the printer. How does that save 5k? I think the business needs revenue.

Your net income is lower when you claim the 5k loss for the business.

It depends on the structure of the business, etc. You're probably going to spend as much on accountants as the few hundred dollars you might save, assuming you don't get audited.

It only works if the 3d printing really brings in some revenue. Otherwise, buying a 3d printer in a business that is doing something else (say, software consulting) cannot be counted as a cost.

Amazon did not made profit in 25 years. Most companies (Microsoft, Apple IKEA..) have subsidiaries that do not make any profits.

If you lose money for 3 years out of the last 5, the IRS will put the onus on you to prove that your business is an actual business and not a hobby. If you're operating at Amazon scale and have lawyers and accountants on staff, maybe being audited isn't a big deal. But if you're a one person operation I imagine it's a lot more stressful

I'm curious how the IRS applies this to startups that may not be profitable until well after IPO.

For businesses that don't make money in their first 3 years, there's some more indepth criteria but they're less cut and dry than the "are you usually profitable" rule

For example do you put a substantial amount of your own time into the business, is it normal to have large startup costs before coming profitable in your field, is the business your primary livelihood or just a side project,etc

I wrote "barely profitable", it makes a few dolars a year. If company has no money, it can not pay for anything. And it is outside USA, what IRS thinks is irrelevant. Some more paranoid people even start new company every year. It takes like $50 and 20 minutes.

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