If a Taxpayer Cannot Satisfy the Three-Out-Of-Five Year Presumption Test

question 22

True/False

If a taxpayer cannot satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity cannot be deducted in excess of the gross income from the activity.

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Definitions:

Merchandise Purchases

The total cost incurred by a retail company to buy goods for resale during a particular accounting period.

Federal Income Taxes

Taxes levied by the federal government on the annual earnings of individuals, corporations, trusts, and other legal entities.

Credit Sales

Transactions where goods or services are provided to a customer with the agreement that payment will be made at a later date.

Uncollectible

Refers to accounts receivable that are considered to be uncollectable and are thus written off as a bad debt expense.