After the first year, they expect you to show at least a modest profit from time to time, and a steady string of losses year after year will eventually get their attention (I'm sure that due to the great Obama economy, they are swamped with continuous-loss returns from many small businesses for the last four years, and haven't been watching this one all that closely, but that will eventually change, or it will come up if they happen to audit you for some other reason).
I forget the ratio of losing to winning years that is their target off-hand, but I'm sure someone here is familiar with it or cares enough to look it up. What happens then is they can decide it isn't a business at all, just a hobby, which means you can't deduct anything but still have to declare anything you got from it as income, and they'll look back over several years of returns and re-evaluate them as well.
I file a Schedule C for a small art metal business my wife and I run, I generally declare an extremely modest profit from it to avoid running afoul of this rule, even if it means letting some of the more esoteric things I could legally claim as expenses go.
You are right on all but time to show a profit, which is around 3-5 years before the iRS gets real antsy. Its RARE any business makes a profit in year one or even year 2, by year 3 you should be knocking on the door of profitability and healthy by year 5.
That said here is some more advice you would be well to heed:
1) Do NOT get greedy
2) Keep excellent records
3) I have NEVER taken the home office deduction, suggest you do not, its a red flag
4) Want to deduct your car/truck sure you can do it, but the IRS is gonna ask if its your only means of transportation, if it is then reread 1 and 2 above. Avoid the IRS red flag by having another means of transportation as in car.
5) Its not a scam, you are in business to make money if you do not make money within 5 years max shut it down, do not keep on trying to milk it, IRS does not like that, shutting down a business does NOT preclude you from starting another. Just make sure you do not start to fence building companies in a row. You have to change business lines or you catch attention of the IRS.
6) Be in business. This means you have to show and income from it, sure expenses may be more than than income, that is fine, but you need to have income or you are not in business. Therefore you have to show growth in revenue, this is called business activity...
I am in year 2 of my current business and like my last one which I sold, like the one before that which I sold all of them had sales tax exposure, this is a GREAT benefit, you are paying taxes (to the state), this is business activity, shows you are active and in business. All this takes work and the IRS knows it, if it appears that you are just doing a paperwork exercise they can sniff you out.
But as stated in my example of a friend who was making nickels and dimes off their weekend forays into garage sales, if they legitimatize it they have the benefit of deductions, expenses etc...so what happened? Well they took my advice and within 2 years she had quit her job and opened a small store, year later he quit his job, they opened a bigger store and are doing well to this day. I had a girl I dated do the same thing, she ended up quitting her job.
Michael Dell (Dell computers) was a kid at UT in Austin building computers for his friends in college, making side money, then he too went legit and he is now worth about $17 Billion. There is no shortage of stories like this...