Like many of us, you’ve probably dreamed of turning a hobby or pastime into a regular business. Or perhaps the current economic condition necessitated that you turn to a side job to earn extra money. You won’t have any unusual tax headaches if your new business is profitable. However, if you consistently generate losses, the IRS may step in and say it’s a hobby — an activity not engaged in for profit — rather than a business.

Under the hobby loss rules, you can claim certain deductions, such as state and local property taxes. Your deductions for business-type expenses such as rent or advertising from the activity are limited to your gross income, however. Furthermore, deductible hobby expenses must be taken on Schedule A of Form 1040 as miscellaneous itemized deductions subject to 2% of your adjusted gross income. Since miscellaneous itemized deductions are repealed from 2018 through 2025, deductible hobby expenses are effectively wiped out until 2026. This creates taxable income without offsetting deductions.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years. The second way is to run the activity in such a way as to show that you intend to make it profitable, rather than operate it as a mere hobby. IRS regulations say the hobby loss rules won’t apply if the facts and circumstances show you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, the IRS and the courts will look to the following factors: how you run the activity; your expertise in the area; the time and effort you expend in the enterprise; whether there’s an expectation the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.