If your business is a sole proprietorship, a partnership comprised of individuals, or (in the United States) an S Corporation, the government expects that you're in business to make a profit — if you're not, the expenses that you can claim will be limited (usually to the amount of income that you've made). Corporations operate under slightly different rules, so they can be more flexible when it comes to claiming losses.

However, even if you're not a corporation, the tax systems do understand that some years are better than others and that start-up operations in particular often show a net operating loss. As a result, they may allow you to claim expenses that exceed your income, as well — in effect, allowing you to claim a loss against other income that you have such as that from paid employment. If this is your situation, you'll need to show that you're in business to make a profit rather than just earning income from a hobby. Factors that will be considered in making this distinction include:

• The time and effort you put into the business, including marketing efforts

• Profits and losses experienced in the past

• The qualifications, experience, and knowledge that you bring to the business

• Whether the loss and the expenses you're claiming are reasonable given the nature and stage (e.g., start-up) of the business or due to circumstances beyond your control

• The extent to which you rely on the business for your living expenses

• Your ability to qualify for financing that could assist the business

• Your intended course of action, including changing operational methods to improve profitability

• Whether there is a reasonable expectation that you'll make a profit in the future

Even if you can't claim all of your deductions in any given year, ensure that you document them and retain all of the paperwork, because you may be able to carry them forward or back to claim them against years in which you do make a profit. As a general rule, three years of losses occurring close together will have the government reviewing your status.