If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity.

Question

Quizplus · Accepted Answer

The three-out-of-five year presumption test allows the taxpayer to presume an activity is a business (and not a hobby) if it is profitable in three out of the last five consecutive years, but it does not permit deducting expenses in excess of gross income from the activity. Deductions can only offset the income generated from the activity, not exceed it.

If a Taxpayer Can Satisfy the Three-Out-Of-Five Year Presumption Test