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Question
How many years can I lose money on my freelance business before I get into trouble?
Answer

If you claim business losses too many years in a row, the IRS could designate your business as a “hobby” for tax purposes. This basically means you aren’t allowed to take anymore write-offs or losses, and might be on the hook for back taxes.

The IRS describes a hobby as a money-generating activity that you aren’t trying to make a profit off of. Profit motivation is a key factor in determining whether something counts as a business or not. A good goal is to demonstrate profit 3 out of every 5 years, this is known as the "safe harbor rule." 

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Answer

If you claim business losses too many years in a row, the IRS could designate your business as a “hobby” for tax purposes. This basically means you aren’t allowed to take anymore write-offs or losses, and might be on the hook for back taxes.

The IRS describes a hobby as a money-generating activity that you aren’t trying to make a profit off of. Profit motivation is a key factor in determining whether something counts as a business or not. A good goal is to demonstrate profit 3 out of every 5 years, this is known as the "safe harbor rule." 

No answer given yet!

Keeper Staff

Keeper is a delightfully smart tax filing software that's especially useful for people with 1099 contracting and freelance income. Our blog breaks down IRS guidance with real-world examples and analysis by tax professionals — empowering taxpayers to save money and take control of their finances.

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