What is a hobby loss vs. a deductible business loss?

A hobby loss is not deductible, but a business loss is.  An IRS audit is usually where the question arises:  Is this “business” really a business or merely a hobby which continuously loses money?  The IRS looks at several factors to determine if a claimed business loss is really a hobby loss.  The most important is: Has the business made a profit in at least two of the past five years?  Other factors examined by the IRS are (a) are the business and personal accounts separate or does the taxpayer comingle his personal funds with business funds, (b) does he pay personal bills from the business account, (c) does the taxpayer have a business plan and (d) what kind of records does the taxpayer maintain to substantiate time spent on the business.  If the auditor finds the year under examination to contain only hobby losses, she will probably expand the audit to include several other years.  There are other factors the auditor may use in making her determination.