Frequently Asked Questions
Who is eligible for the Profit Motive Presumption Election?
Available to individuals and S corporations starting a new activity that may initially generate losses but is intended to be profitable.
How does the Profit Motive Presumption Election work?
Taxpayers can elect to delay a determination of whether an activity is 'for profit' to allow more time to meet the 3-out-of-5 year profit rule (or 2-out-of-7 for horses).
What law authorizes the Profit Motive Presumption Election?
The Profit Motive Presumption Election is authorized under IRC §183 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §183
Source: Internal Revenue Code, Title 26, United States Code
§ 183. Activities not engaged in for profit(a) General ruleIn the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.
(b) Deductions allowableIn the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed—(1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and
(2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1).
(c) Activity not engaged in for profit definedFor purposes of this section, the term “activity not engaged in for profit” means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.
(d) PresumptionIf the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which consists in major part of the breeding, training, showing, or racing of horses, the preceding sentence shall be applied by substituting “2” for “3” and “7” for “5”.
(e) Special rule(1) In generalA determination as to whether the presumption provided by subsection (d) applies with respect to any activity shall, if the taxpayer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) following the taxable year in which the taxpayer first engages in the activity.
(2) Initial periodIf the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activity, if the gross income derived from the activity for 3 (or 2 if applicable) or more of the taxable years in such period exceeds the deductions attributable to the activity (determined without regard to whether or not the activity is engaged in for profit).
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