Business losses and expenses

If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby.

This rule of thumb makes places a huge burden of proof on young businesses. On the one hand, the IRS expects new businesses to incur a loss. It is normal for a business to have a year or two of losses before becoming profitable. On the other hand, it is likely that a business could have several years of losses before ever making a profit. In fact, several such cases have been sent to the Tax Court.

Business idea
If you are filing your income tax as a sole proprietor or partner, using the T1 form, when you are filling out Form T2125 (Statement of Business or Professional Activities), you will be listing various business expenses. If your business expenses exceed your business income, you will record a business loss on this form.

Will you get to "use" this business loss and claim the business expenses? That depends on whether or not you have other income. If you do, you may wish to take the income from your business (the non-capital business loss) and use it to offset your other income, in effect, claiming the business expenses.