You do not have to show a profit in order for it to be considered a business. You have to show an "intent" to make a profit. Obviously, if you are profitable the odds are more in your favor with the IRS. The presumption is if you are profitable in a 3-out-of-5 year period, it is a business. The IRS can still challenge your activity even if you meet the 3-out-of-5 year rule.

We had a big-time comp racer out here lose his advertising/racecar deductions as the IRS didn't consider it to be an ordinary and necessary expense for his line of business. So be careful in going that route.

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, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers’ expertise); the time and effort you expend in the enterprise; whether there’s an expectation that 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.