DYI solar and notifing utilities company

System
System Posts: 2,511 admin
I have a simple question. I want to start off small with my solar project and use a 224 watt panel and a enphase grid tie in micro inverter. However I heard that I need to get a building permit to put up a solar panel which could cost more than the unit it self. Is this true, I live by newriver, az outside phoenix az. Also I heard that I have to contact the utilities company. I don't see why. what I will be generating is less watts then I consume, so I will not be feeding the grid. I do not want the utility company to add another fee.

If I have to do the stuff that is mentioned above and if it is too costly. I might consider using a non UL approved grid tie in by the ac outlet in the back yard porch and put the panels in the backyard on the fence to avoid the building permit. What is your opinion?

If I put the panels on the fence and tie in at the main, what is the maximum length I can have to avoid loss in the line. The backyard fence to the main is about 30 to 50ft. I do not have the exact figures. I have an underground conduit that was added for a future spa that I can use.

Also how will the utility company know that I tied into the main. I know that if the AC power goes out the inverter will sense it and not produce ac for me unless I get a ac coupled backup. SO I can back feed when there is a outage.


I consume about 18kwh per day using the ac.
I just want to supplement my energy use for day offsetting the higher rates for the things I have on during the day when I am not home.
Modem, 2 routers, 2 phones, water cooler, house alarm, refrig, stove, (AC unit too much power to offset it)

Comments

  • Cariboocoot
    Cariboocoot Banned Posts: 17,615 ✭✭✭
    Re: DYI solar and notifing utilities company

    I don't like bureaucrats at all, but you know sometimes there's a good reason for regulations.

    The people to ask your questions of would be the local planning board/building commission (whatever regulator body covers construction and alterations) and the local power company.

    If, for whatever reason, you do an "end run" around the officials don't tie it to the grid. You can set up an experimental, 'stand alone' off-grid system if you just want to see what it's like. A panel not fastened to any structure can't be construed as an alteration so it shouldn't come under those regulations. The Enphase grid-tie set-up won't work for this; you need batteries with no grid. Over-all, really small scale solar isn't very practical.

    So the question you really have to answer is: what are you trying to achieve? When you add up the wattage of things you mentioned you see 200 Watts isn't much (that is a peak rating, not constant). It won't, for example, run a refrigerator. Stove? Electric stove? Forget it!

    I'm off-grid; I use 1/6 the kW/hrs per day you do. I suggest your first step (and you'll hear this echoed repeatedly on this forum) is to look into conservation. You get a much better return per $ reducing your energy usage than by adding solar of any kind.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    This is your choice...

    No, the utility cannot tell if you connected a small grid tied panel to your home as long as you don't turn the meter backwards.

    A 200 watt panel may generate ~1kWhr per day--or about $0.10 of electricity per day.

    The utility probably will not charge you extra for having GT solar power (a few utilities have required a second meter + meter reading charges, in California we used to have to pay for a new Time of Use meter).

    The whole thing with building permits/inspections is for your safety.

    What gauge wire? For your one panel/system, you are looking at ~1 amp of 240 VAC... So current/voltage drop will not be a problem unless you are going a long distance. A standard 15 or 20 amp circuit with 14 or 12 awg wire (properly rated/installed/fuse/breaker/ground fault protected) should be fine.

    The problem with a do-it-yourself installation is that these systems are exposed to sun/wind/water (lightning, ice, etc.) in a permanent outdoor installation. If you do not use the correct materials/practices, you can create an electrical/fire hazard for your home.

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
  • niel
    niel Solar Expert Posts: 10,300 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    welcome and know that just because the inverter is at the pv and it is small power wise does not make it plug and play. all wiring and interconnections are to be per nec or your local inspector's requirements. this is not like plugging in an electric appliance, even though the power flow is reversed, but is more akin to that appliance needing wired all of the way to the panel with proper wiring and fusing. in addition there is also the question if the total buss currents are being exceeded and most likely 1 of these pvs won't exceed it, but with more added in the future, under the same misnomers of plug and play or low power, it could.

    " If you do not use the correct materials/practices, you can create an electrical/fire hazard for your home."
    i'll add to that a possibility of death or severe injury due to electrocution. most places do not mind a homeowner doing it themselves, but they must inspect it to be sure it is proper. i'll also add that some utilities are being jerky when it comes to solar power too by going beyond just safety reasons and do make for some very restrictive standards to install solar as they don't like the idea of a generating source connected to their lines that will 1> not be in their control and 2> that will lower what you owe to them.
  • System2
    System2 Posts: 6,290 admin
    Re: DYI solar and notifing utilities company

    When I say DIY, I meant the design will be done by me with the help of experts. All tie ins will be done by an electrician.

    I know most people will say that you will not get a return on your investment by going this approach. To me this will be a hobby. I think it will be fun to use my EE degree since I write software for a living.

    Not only will I generate power I will reduce my carbon footprint. I will be installing a radiant barrier in the attic, before I do my solar project. I am just doing the research right now.

    My original approach was to do an off the grid design and have the lights in the garage and my house security system on this system. However I don't know where to put the batteries if I should put the batteries in the attic or the garage floor. It would be easier to have them in the attic.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    Generally, batteries should be kept around 77F... For approximately every 10C rise, the life of the battery will be cut by 1/2.

    With the low price of solar panels at this time and available fed/state/local tax credits/rebates--installing a ~3kWatt system now is not the worst thing to do.

    Generally, price wise, 3kW and larger systems have good priced GT Inverters available (smaller inverters/systems, the price per watt goes up)--and you are spreading your fixed costs (permits, inspection, installers) over a larger system.

    The major caveats I have about the Enphase inverters are cost and lifetime expectations when mounted under the solar panels.

    Cost, there current pricing does not drop when system size is increased (unlike large centralized GT inverters) and they require a separate network attachment to get data from them (logging power stats). And, you may have to subscribe annually to their website server to look at your own data (I am not quite sure if you can access the data from the network box without the subscription--I have not seen any clear instructions on that yet).

    There are other GT inverters (~3kW) that you can choose that have either known/public information on how to read their data streams--and even some free software you can install on an old laptop PC to log/push data to a website.

    The other is just the whole issue of mounting the small inverters in a very temperature/weather adverse environment and servicing issues if any of them go bad in the 25-40+ year expected life of the solar panels. Having to unbolt a bunch of panels on a roof to get at the one in the middle of the array that has failed...

    18kWhrs per day for AC does not sound to bad (less than 600 kWhrs per month). It sounds like you have already addressed many of the conservation issues that we tell people to do before considering installing solar PV power.

    Installing one panel at a time is not the way I would recommend to proceed. Solar RE systems generally do not scale well (when adding 1 panel or 1 battery at a time)... Many times you have to get rid of the old equipment (charge controller, battery bank, inverter) as you go up in size. There are even issues with getting solar panels shipped to you (they are thin glass--so the coist to pack and ship one panel may not be much different than the costs to pack and ship a pallet full).

    The Enphase can offer you a bit easier time at scaling--if absolute costs, permits, fees, installation, are ignored. Try pricing out a 3.5 kWatt (3.0 rated) GT system with both types of GT inverters, and see what you get.

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
  • icarus
    icarus Solar Expert Posts: 5,436 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    Before you get discouraged about permitting issues,, contact your local utility/building dept. and see what is really needed. In one jurisdiction I know of the electrical permit is $25 and no building permit required. Maybe you are worrying too much. I can't imagine that a building permit even if it required would be much of a deal for a single panel mounted on a fence.

    Tony
  • dwh
    dwh Solar Expert Posts: 1,341 ✭✭✭
    Re: DYI solar and notifing utilities company

    Since no one else has specifically mentioned it then I guess I will.

    Linemen get awfully irritated when working on a line that is supposed to be dead, but in fact isn't because some #E%#$^%*&$%^ homeowner is backfeeding the grid without &*((^#@%^@$%# TELLING ANYONE.
  • niel
    niel Solar Expert Posts: 10,300 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    the inverters should be equipped with anti-islanding features so i don't believe it is necessary to always mention that reason. they don't get approved without that feature because of lineman's safety and other possible hazards.
  • praseto
    praseto Registered Users Posts: 22
    Re: DYI solar and notifing utilities company

    The questions remain is it really worth to do a GT system with only one 220 watt panel.
    If you use that panel for one year it will make 200w*5h/day=1kw*365=365kw/year*$0.10=$36.5
    For you to pull a permit, grid connecting wires, inspection, getting electrician to check your work, breakers… etc. Sound like a lot of work. Even you don’t get a permit you risking too much- fire hazard, getting the power company turn your power off if in any moment your panel is producing more than your house is using. Believe me there will be a moment in the morning when your ac, refrigerator or coffee maker are not on but the panel will be producing. With the new smart meters they will know. They may even disconnect your power demanding you get a permit and inspection first before they put it on again.
    I don’t want to discourage you. That is not why we are here. If you want to try solar do it legally, or every time you see a power company truck pass by you will thing they are coming for you. What you can do is use this panel for a dedicated circuit. I use my first panel to provide attic ventilation. The more the sun is shining the faster that 5-10 fans spins. This way you can actually save more money on A/C cost. You can do landscape lights. Get a charge controller and couple a batteries and led landscape lights and you will be happy every time you come at night. Then save more money and get panels and legal GT system.
  • Cariboocoot
    Cariboocoot Banned Posts: 17,615 ✭✭✭
    Re: DYI solar and notifing utilities company

    For off-grid systems the goal is to make the system as small as possible because each kW hour of power comes at a great price.
    For grid-tie systems it's a good idea to make it as large as possible so that the permit and install process is worth the effort (same hoops to jump through for 200 Watts or 2000).
    With either you should begin with conservation: reducing power usage will shrink the size requirements of an off-grid system and increase the benefit of a grid-tie one. :D
  • Skippy
    Skippy Solar Expert Posts: 310 ✭✭
    Re: DYI solar and notifing utilities company
    I might consider using a non UL approved grid tie in by the ac outlet in the back yard porch and put the panels in the backyard on the fence to avoid the building permit. What is your opinion?

    I have had the same thought, I picked up my panels, and a matching GT inverter, then called the local power company. Found out that there where so many loops and hoops to jump thru, it was easier to put in a small battery bank, and then use that to learn how much power I am actually using - to reduce my bill.
    First, I have a different problem then you. My hydro company was really helpful, even offering to come and install a special meter that would run backwards FOR FREE !:D Then they told me that the "system" would have to be inspected by the "ontario power authaurity" . . and thats where it opened up a whole can of worms. . the one that stopped me, was the cost of the final inspection. . if an electrician does the work, it costs around 300 $ but if I do the work myself, its around 600 $. not worth the price of a small system like mine . . .:grr
    I would not reccommend connecting anything to the grid on your own, mainly because if they find out, you will probably have your hydro shut off, and they WILL make you pay - in one form or another. . . and they won't soon forget it either. .

    Just an opinion from a fellow newbie who had the same idea - "whats wrong with just plugging em in and reducing the hydro bill ? " - it's not that easy. .. :p
    2 - 255W + 4 - 285W PV - Tristar 60 amp MPPT CC / 3 - 110W PV -wired for 36V- 24V Sunsaver MPPT CC / midnite bat. monitor.
    1 KW PSW inverter 24V / 2.5 KW MSW inverter-24V ~ 105 AHR battery.
    3 ton GSHP.- 100 gallon warm water storage / house heat - radiant floor / rad
    9 -220W PV - net meter - Enphase inverters and internet reporting system.
    420 Gallon rain water system for laundry.***  6" Rocket Mass Heater with 10' bed for workshop heat.
    Current project is drawing up plans for a below grade Hobbit / underground home.
    Google "undergroundandlovinit" no spaces.
  • solarix
    solarix Solar Expert Posts: 713 ✭✭
    Re: DYI solar and notifing utilities company

    Your utility APS, doesn't charge you anything to hook up a GT system - in fact, they will pay you $.20/watt if you install at least a 1kW at a time. However they drive up the cost by requiring a permit, AC disconnect and PV kwhr meter. If you have a licensed friend that will do the work or supervise your work, then it is probably worth doing a small system. Are you in Maricopa county or Yavapai county or does New River have a building dept? There are still a fair number of people that get away with "guerrilla solar" but I wouldn't want to risk being found out by the utility. You could put in a small array like a 1000w with a larger GT inverter like 3300watts, then add on more modules later.
  • ggunn
    ggunn Solar Expert Posts: 1,973 ✭✭✭
    Re: DYI solar and notifing utilities company

    If I have to do the stuff that is mentioned above and if it is too costly. I might consider using a non UL approved grid tie in by the ac outlet in the back yard porch and put the panels in the backyard on the fence to avoid the building permit. What is your opinion?

    Not a good idea. In the first place, those things typically don't produce enough power to make it worth the investment. In the second place, whatever circuit you connect it to is then provided with more available current than the wiring is designed for, so it can cause a fire. In the third place, if the power company catches you doing it they may cut off your service.
  • solar_dave
    solar_dave Solar Expert Posts: 2,397 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    So your in New River, AZ and I assume on APS. I believe if APS drives by and see your panel(s) and you don't have an interconnect agreement with them they can pull the meter and disconnect your service. I have attached what I think is the current Requirements to do the interconnect and a sample Residential agreement. Really to do the interconnect at least a 2-3Kw system is needed to break even on the costs associated with permitting and extra equipment. I do know that gorilla installs are definitely frowned upon. I know on my system they even took pictures for their files, but that might be because it is a fairly large system.

    One thing to consider is if you have a fire for any reason, even not related to the solar, your insurance company may not pay if non-permitted modifications are made to the property. And certainly they would not pay off on you solar equipment. The permitting process and the interconnect agreement are there for your protection really.

    What you could do is have a off grid system totally disconnect from the grid and probably ground mounted so building codes are avoided and operate that, just make sure if the power used is in your residence that a licensed electrician is involved for insurance purposes.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    Just to be clear, I am sure there are a lot of guerrilla installations--Some "safe" and some "not so safe".

    And while the utility/local inspectors have the "right" to pull the meter/red tag the home if an unapproved--I am not sure I have ever read about that happening... In California, the utility can even sue over an otherwise "legal and safe" Off Grid Power system if you have utility power (state public utility commission regulations over "stranding" of utility assets because the customer is generating their own power without paying utility fees for "stranding").

    Anyone here ever seen/heard a meter being pulled/home red-tagged over an "illegal" solar installation?

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
  • niel
    niel Solar Expert Posts: 10,300 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    solar dave,
    i don't believe that seeing pvs at a residence is proof of a gt connection or warrants an automatic reprimand by them because you have pvs. off grid arrangements are done just to avoid their scrutiny. if the utility falsely disconnects you because you have pvs then they are setting themselves up for a lawsuit.

    on the other hand, if you are selling to the grid illegally then this can carry the full weight they can gather down upon you.
  • solar_dave
    solar_dave Solar Expert Posts: 2,397 ✭✭✭✭
    Re: DYI solar and notifing utilities company
    niel wrote: »
    solar dave,
    i don't believe that seeing pvs at a residence is proof of a gt connection or warrants an automatic reprimand by them because you have pvs. off grid arrangements are done just to avoid their scrutiny. if the utility falsely disconnects you because you have pvs then they are setting themselves up for a lawsuit.

    on the other hand, if you are selling to the grid illegally then this can carry the full weight they can gather down upon you.

    I suspect it just gives them a trigger to look harder at you. I know the APS truck did come around here about twice a year and look ours over. Not seen them lately. I don't think they expected the super low bills that I am paying, as it was a combination of conservation to reduce consumption and a largish solar system.

    They generally have access to all your electrical metering and power panels, pretty easy for them to tell.
  • niel
    niel Solar Expert Posts: 10,300 ✭✭✭✭
    Re: DYI solar and notifing utilities company

    yes, they are allowed to suspect all they want to, but they can't prove what you have unless they see the meter going backwards or you are selling and you let them in to inspect your setup. my utility does not have access to my power panel and has no right to as it's inside my home and i own it. the utility is free to inspect to the meter which belongs to them. when the meter goes backwards i agree that it's pretty easy for them to tell, but outside of that it does not constitute proof of an illegal gt connection unless, as i said before, you are dumb enough to show them.
  • solar_dave
    solar_dave Solar Expert Posts: 2,397 ✭✭✭✭
    Re: DYI solar and notifing utilities company
    niel wrote: »
    yes, they are allowed to suspect all they want to, but they can't prove what you have unless they see the meter going backwards or you are selling and you let them in to inspect your setup. my utility does not have access to my power panel and has no right to as it's inside my home and i own it. the utility is free to inspect to the meter which belongs to them. when the meter goes backwards i agree that it's pretty easy for them to tell, but outside of that it does not constitute proof of an illegal gt connection unless, as i said before, you are dumb enough to show them.

    Generally here, the panel is right next to the meter on the outside of the house.
  • peakbagger
    peakbagger Solar Expert Posts: 341 ✭✭✭
    Re: DYI solar and notifing utilities company

    My experience with my local utility was not difficult for bth my systems. My town does not do electrcial inspection so the utility waives the inspection. Basically I filled out a couple of forms and let them know the system was complete and ready to turn on. The representative then gave me authorization to test the system (I had a bi-directional meter) and then he told me to wait until I got the signed approval before switching from test mode to operating mode. They never did inspect it.
  • azjustin
    azjustin Registered Users Posts: 2
    Re: DYI solar and notifing utilities company

    I got my permit from city of Tucson at the end of October and the "solar waivers" were re-instated at that time, meaning $0 cost for solar permit fees. I'm going 100% self install (DIY) so the learning curve was a bit high but simple enough to overcome.

    Don't get me wrong, there were many hoops to jump through, but it was easy enough to find previously permitted plans online and just copy them, inputting the information relating to my project of course. In the end of things, all I really needed was a three line diagram, a site plan, and the wire size/system calculations. Simple enough when you have something else to copy from.

    From what I have understood through the process: the city wants everything constructed to code and to be safe, the power company wants to make sure no one dies from shoddy equipment (non OSHA listed) or illegal back feeding. The combination of the two make a good system that no one (yet) has even batted an eye at. Consider it a trial run to prove you know enough about what you are doing to install more panels later! ;)

    Also keep in mind that tax advantages are based on installed costs, not just panels and inverter (at least according to our CPA). So the solar/battery/garden/water shed that we're building also qualifies for a tax reduction since it's involved in the overall scope of the project.

    Just some thoughts for you, good luck!
  • rollandelliott
    rollandelliott Solar Expert Posts: 834 ✭✭
    Re: DYI solar and notifing utilities company

    yeah, but the downside is that when you DIY, you cannot count your labor as an installed cost, for tax purposes.
    But if you hire someone, and they charge you $10,000 for labor, you can deduct that from your taxes.

    I guess if you could count your labor then people would tell the govertnment that their labor was worth $100,000.00
  • ggunn
    ggunn Solar Expert Posts: 1,973 ✭✭✭
    Re: DYI solar and notifing utilities company
    yeah, but the downside is that when you DIY, you cannot count your labor as an installed cost, for tax purposes.
    But if you hire someone, and they charge you $10,000 for labor, you can deduct that from your taxes.

    True, but also realize that a justifiable RE expenditure of $10k results in only a $3k reduction of your tax liability. It's still a net $7k out of pocket.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    You can deduct your labor if you actually charged yourself for it and pay all the employment/insurance taxes on such labor (i.e., ran your own business). But then the deduction would probably not be worth it because of the high cost of making it a business expense.

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
  • ggunn
    ggunn Solar Expert Posts: 1,973 ✭✭✭
    Re: DYI solar and notifing utilities company
    BB. wrote: »
    You can deduct your labor if you actually charged yourself for it and pay all the employment/insurance taxes on such labor (i.e., ran your own business). But then the deduction would probably not be worth it because of the high cost of making it a business expense.

    -Bill
    IANAL, but it seems to me that one of you (either the "you" who is paying or the "you" who is providing the service) would need to be incorporated or somehow or other established as a different entity to make that happen.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    Probably--You cannot just write a check to your checking account and take a deduction for labor. That would be tax fraud (the government hates competition :p).

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset
  • inetdog
    inetdog Solar Expert Posts: 3,123 ✭✭✭✭
    Re: DYI solar and notifing utilities company
    BB. wrote: »
    You can deduct your labor if you actually charged yourself for it and pay all the employment/insurance taxes on such labor (i.e., ran your own business). But then the deduction would probably not be worth it because of the high cost of making it a business expense.

    -Bill

    Here is another way of looking at it that might make it clearer. Take a tax-deductible charity as the example instead of an RE tax credit.

    If I do 20 hours of work for which I would normally charge $25 per hour, bill the charity $500 and then donate the $500 right back to them, I have gotten a charitable deduction equal to the amount which I earned, making a net tax effect of zero.

    If I just do the work for free the result for the me and for the charity will be identical, so the tax result should be the same. That means that I cannot deduct as a contribution the value of my own labor unless I also get paid for it.

    The same principle applies here, IMHO. You can only count the value of your labor for purposes of the tax credit if you also count it as income. In this situation, it somehow seems less fair, but that is the way it goes....

    Disclaimer: I am not a tax professional and I do not even play one on TV. For answers that count, ask a professional. That way you can sue them if the answer is wrong. :-)
    SMA SB 3000, old BP panels.
  • azjustin
    azjustin Registered Users Posts: 2
    Re: DYI solar and notifing utilities company

    For me, it will be written off as a business expense and I am allowed to charge myself fair labor $$ since the project will be used as a model for "clients" (as I am told). I also am not a tax professional, but choose to follow the advice of people that used to do internal tax audits for small companies such as Boeing and Raytheon ;)

    Even if I wasn't allowed to perform the labor myself, a labor invoice is only a MS Word document away. I hate to be that guy, but every penny counts.

    The point I was trying to make earlier is that you should maximize every dollar spent! If you are doing a roof mount system and your roof needs replacing, do it at the same time. If your service needs upgrading and you want to do solar, put that cost into your project. If you want to build a guest quarters, call it a solar shed, and when everyone goes home finish it how you want. All of this is tax deductible. Make it count when you can.

    *standing on my soapbox*

    Everyone should have a small business even if it's classified as a "hobby business". All your tools can be deducted, renovations can be partially written off, vehicle mileage can be written off, internet connections and cell phones go into the taxes, etc.. As long as you file a single return, your taxes should go down.

    *off of soapbox*

    Sorry for the rants, I hope this helps at least the 2c I gave.
  • Cariboocoot
    Cariboocoot Banned Posts: 17,615 ✭✭✭
    Re: DYI solar and notifing utilities company
    azjustin wrote: »
    Everyone should have a small business even if it's classified as a "hobby business". All your tools can be deducted, renovations can be partially written off, vehicle mileage can be written off, internet connections and cell phones go into the taxes, etc.. As long as you file a single return, your taxes should go down.

    In Canada if your "business" doesn't turn a profit in 4 years out of 7 the Government determines it is not a real business and will go back and remove all those tax deductions then hand you the bill, possibly with penalties and interest. Not sure it's the same in the U.S., but it's probably similar.

    If you as a business charge yourself as an individual you may get the tax deduction as an individual but as a business you have to pay tax on that "income". The risk of the IRS seeing this as "tax fraud" is great, and the penalties severe.

    I'm not a tax professional either, but my wife is. Although there are differences between Canada and the U.S. the principle is the same: You can claim anything, until you get caught.
  • BB.
    BB. Super Moderators, Administrators Posts: 33,431 admin
    Re: DYI solar and notifing utilities company

    Here is one article:
    If the net profit figure on your Schedule C is a negative number, you have a business loss. The vast majority of freelancers incur losses. This is how losses work. First, your business loss reduces your total income. On Form 1040, your total income is calculated on Line 22. The loss also reduces your Adjusted Gross Income (Line 36), and Taxable Income (Line 42). As such, your business loss reduces your income tax. If you have a day job (on a W-2), this means you will get a bigger refund compared to someone who earned the same amount of wages but did not have a freelance gig side business.
    Reducing your taxes in this way is an excellent tax strategy. In fact, many tax professionals have encouraged people with high incomes to convert their hobbies into "businesses" so they can have a loss to reduce their income. Not surprisingly, the IRS has caught on to this strategy.
    There's no hard-and-fast method for distinguishing between a hobby and a real business just based on the tax return. After all, the tax return is just a piece of paper, and so there's no way to tell a legitimate business from a hobby apart except by using a rule of thumb.

    [h=3]Hobby Loss Rule of Thumb.[/h] If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby. This rule of thumb makes places a huge burden of proof on young businesses. On the one hand, the IRS expects new businesses to incur a loss. It is normal for a business to have a year or two of losses before becoming profitable. On the other hand, it is likely that a business could have several years of losses before ever making a profit. In fact, several such cases have been sent to the Tax Court.
    If you cannot meet the 3-out-of-5 year rule (3 years of profits in a 5-year period), you can still prove your profit motive using the following nine factors:
    1. You carry on the activity in a businesslike manner,
    2. The time and effort you put into the activity indicate you intend to make it profitable,
    3. You depend on income from the activity for your livelihood,
    4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
    5. You change your methods of operation in an attempt to improve profitability,
    6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
    7. You were successful in making a profit in similar activities in the past,
    8. The activity makes a profit in some years, and how much profit it makes, and
    9. You can expect to make a future profit from the appreciation of the assets used in the activity.
    This list is found in IRS Publication 535 Business Expenses.

    With the way most of the large businesses in the US are operated and don't pay taxes on profits (auto manufacturers, airlines, green tax/investment credits, etc.)--They appear to all be not for profit hobby setups.

    -Bill
    Near San Francisco California: 3.5kWatt Grid Tied Solar power system+small backup genset