Tess Has Started a New Part-Time Business

question 38

True/False

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.

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Definitions:

Annual Accounting Period

The 12-month period a company uses for accounting purposes to report its financial performance.

Prepaid Rent

The payment made for rent before it's due, recorded as an asset on the balance sheet until it's recognized as an expense in the period to which it relates.

Adjusting Entry

An entry made in the accounts to correct or allocate income and expenses to the appropriate accounting period.

Three Months Rent

An accounting entry typically categorized as a prepaid expense, representing payment for rent before it's due.