In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?
A)The activity shows a profit for 3 of the 5 previous years.
B)The activity shows a loss for 3 of the 5 previous years.
C)The activity shows a profit for 3 of the 7 previous years.
D)The activity shows a loss for 3 of the 7 previous years.
E)None of these

Question

Quizplus · Accepted Answer

According to the tax law, if an activity shows a profit in at least three of the past five tax years, it is presumed to not be a hobby, but rather a legitimate business. This is known as the profit/loss test. Therefore, option A is the correct answer.

In Determining Whether an Activity Should Be Classified as a Hobby