Question

For the years 2016 through 2020 (inclusive) Kinza, a best-selling author, has been involved in operating an antique store. In 2016, 2017 and 2018 her revenue exceeded the expenses from the activity. In 2019 and 2020, the antique store generated a loss. Which statement is correct? (LABEL AND SHOW ALL WORK WITH CALCULATIONS)

A) The activity is a business. The IRS cannot prove it is a hobby.

B) The activity is a hobby. Kinza cannot prove it is a business.

C) The activity is presumed to be a hobby. However, Kinza may prove it is a business.

D) The activity is presumed to be a business. However, the IRS may prove it is a hobby.

Answer 1

Option d is correct.

The activity is presumed to be a business. However, the IRS may prove it is a hobby.

Kinza can assume it to be business because she earned profit for three consecutive years.

But since it has generated loss for the next 2 years, so there is a probable chance that IRS may prove that it is a hobby for Kinza and not business if it does not meet the other requirements of record keeping, documentation, etc. IRS may prove that she is not doing it with profit motive thus its not a business.