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Given your situation, it may be wise to consider showing a profit in the third year for safer compliance with IRS rules and to avoid triggering scrutiny under the “hobby loss” rule.

Here’s how I would approach this:

1. Safe Harbor Compliance: The “3 out of 5 years” rule is indeed a safe harbor; showing a profit this year would help solidify your business status. Although failing to meet the safe harbor doesn’t automatically classify your business as a hobby, a profit helps support your case in any potential IRS inquiries.

2. Profit Motive and Burden of Proof: Even if you don’t rely on the business income now, your planned future reliance on it, combined with growth in revenue and operational improvements, supports your profit motive. Continuing to structure losses through bonus depreciation could raise questions about intent, as the IRS may see repeated losses as lacking a genuine profit motive.

3. Depreciation Losses: Since most of your losses are from depreciation (a common business expense), it could work in your favor if audited. Depreciation isn’t typically viewed as “unsustainable,” but showing a profit sooner helps demonstrate viability and intent to make the business self-sustaining.

4. Recommendation: Given the above, I’d recommend showing a modest profit in this third year by using standard depreciation rather than bonus. This approach will reduce scrutiny and give you a stronger defense if audited. You can still benefit from depreciation without necessarily reducing your income to a loss. But consult a tax professional to align this strategy would be better.