Been down this road with my camera business.

If you are near a location with a Borders or Barnes and Nobel bookstore just sit down with a few of the "starting a small business" books and get a brief overview of what is requried by the IRS.

For tax purposes you need to be able to demonstrate to the IRS that your "business" is truly one operated to make a profit and not just a hobby. The IRS lists certain standards you must meet. Do you dedicate a minimum amount of time to the business (500 hrs minimum). Do you keep proper books and use accepted acounting methods? Do you maintain seperate business acounts from your personal accounts? Do you seek help from experts to improve your business? Do you persue strategies to increase income year to year? Do you advertise? Do you maintain an inventory? Etc, etc.

The main thing is you need to show a profit somewhere in the first 5 years. I think the rule used to be 3 out of 5 years. I am not sure if that is true now. Of course you could go longer if you can demonstrate continued efforts to make a profit while incuring debt in that pursuit. You will also have to deal with state laws regarding collecting and reporting of local and state sales taxes if applicable. And if you go as a sole-proprietor and make a profit of more then $400 you have to pay FICA/Medicare taxes for yourself.

If you can meet the IRS guidelines, it is a great strategy to offset regular income from another job or a spouses income with the expenses of your profession. Want a new lens? Write off against earnings. Whole new darkroom? Write off against earnings. Just remember, eventually you have to show a profit and demonstrate a profit motive (something to be taxed) to the IRS.

This year and next I will be doing business as a sole-proprietor. (87% of all small businessses are sole-proprietorships). Then I will probably reorganize as an LLC. I could have filed in 04 and showed a loss, but felt it more prudent to only have one year of losses where I could one time expense out some gear and tools I require.