three-of-five test

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Three-of-five test is a rebuttable IRS presumption that a business venture that does not make a profit during three out of the last five consecutive years of operation is a hobby and is not a business for the purposes of assessing tax - per [Section 183 (d)]. Therefore, any losses arising out of such a hobby which is considered a not-for-profit activity, cannot be used to offset other income. Deductions for hobbies are claimed as itemized deductions through Form 1040.  

[Last updated in November of 2021 by the Wex Definitions Team]