You can operate with a year-end deficit for five years before you're going to draw some real attention... And if you get audited, you better have some good documentation showing it was an attempt at a real business, and more specifically -- what you attempted to change within those five years to make the venture profitable.

An audit can be an excruciating experience, and the IRS can go back and collect back-taxes for the whole time period if your business was deemed nothing more than a hobby.