Tess has started a new part-time business.She is concerned that the IRS will call it a hobby if her return is audited.This first year of business showed a small profit,and she expects it to continue to show modest profits.She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS.Because of the three-year statute of limitations,this will not be possible for the first year of business.

Question

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The three out of five year profit rule allows a business to be presumed for-profit if it shows a profit in at least three of the first five years, regardless of the statute of limitations.

Tess Has Started a New Part-Time Business