And if you handle your enterprise properly, you may even be able to claim a loss on your tax return that can lower the tax you owe on wages, interest and dividends. But keep in mind that the IRS is on the lookout for taxpayers deducting losses related to personal pastimes. If the tax agency decides your endeavor is not a legitimate business, your deductions are limited to the income from the activity. At the same time, the IRS knows that it's not unusual for any business to have a loss in the first year or two. Operate at a profit within a certain time period.
Timing is critical.
Maintain a tax diary listing business mileage, travel, entertainment and other costs. Also keep a diary documenting the time you spend. You don't have to devote 40 hours a week, but the IRS wants to see regular, active involvement. Save all receipts and act like someone trying to make a profit. In a recent a Tax Court case, a successful, highly paid CEO was denied a loss on his part-time horse training business.