ExpertMedium1 markMultiple Choice
CPA · Question 23 · Area I: Individual Compliance and Planning
A taxpayer breeds dogs. In Year 1, the activity generates $5,000 revenue and $12,000 expenses. The activity has shown a profit in 3 of the last 5 years. The IRS challenges the loss deduction. Which factor most strongly supports the taxpayer's position that this is a for-profit business?
A taxpayer breeds dogs. In Year 1, the activity generates $5,000 revenue and $12,000 expenses. The activity has shown a profit in 3 of the last 5 years. The IRS challenges the loss deduction. Which factor most strongly supports the taxpayer's position that this is a for-profit business?
Answer options:
A.
The taxpayer enjoys the activity.
B.
The taxpayer has substantial income from other sources.
C.
The presumption rule applies because of the profit history.
D.
The losses are due to customary startup costs.
How to approach this question
Check the 'Safe Harbor' presumption rule (IRC §183). Profit in 3 of 5 years (or 2 of 7 for horses) presumes a for-profit motive.
Full Answer
C.The presumption rule applies because of the profit history.✓ Correct
IRC §183(d). If the gross income exceeds deductions in 3 or more of the taxable years in the period of 5 consecutive taxable years, the activity is presumed to be engaged in for profit.
Common mistakes
Focusing on subjective factors like enjoyment rather than the objective profit history test.
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