A loss on your Idaho business tax return is by no means a sure cause for audit. It is not uncommon for new businesses to show a loss the first year or two, with high business startup costs and early, slow business.

A warning however, to people who manage to show a business loss year after year: if you do not show a profit for at least three out of five consecutive years, the IRS, if it audits you, might rule that your Idaho business is not really a business, but a hobby. The IRS treats any income from a hobby as taxable income, but losses are not deductible. By contrast a business loss is deductible. (I you breed, train, race, or show horses, the IRS hobby loss test is two out of seven years instead of three out of five.)

The hobby loses rule is not a firm rule. An Idaho business can deduct losses for several years in a row without ever being challenged by the IRS. In the event of an audit, the IRS will allow the ongoing losses if they are convinced that you are operating a real business and trying, though unsuccessfully, to make a profit. The key issue is intent. What are you really doing? Trying to earn some money, or just having fun? It will help if your Idaho business looks like a real business with income and expense records, bank account, business cards and if you’re devoting to it in a businesslike manner.