Question

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

1) True
2) False

Answer 1

Hobby expenses can only be deducted up to the amount of income generated by the hobby according to the IRS presumption test.

The statement is false.

Step-by-step explanation:

If a taxpayer's activity is classified as a hobby, the expenses associated with it can only be deducted to the extent of the gross income generated by the activity. This means you cannot use a hobby loss to offset other income. The three-out-of-five-years test is a guideline that the IRS uses to determine whether an activity is a business or a hobby.

In general, if an activity generates a profit in three out of the last five consecutive years, the IRS presumes it's a business instead of a hobby, allowing for the potential deduction of losses in excess of the activity's gross income. However, if the activity does not pass this profitability test, it's presumed to be a hobby, and deductions are capped at the hobby income level.

The statement regarding the three-out-of-five-years presumption test in relation to hobby losses is false.