General rule
In 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.
Deductions allowable
Activity not engaged in for profit defined
For 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.
Presumption
If 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”.
Special rule
In general
A 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.
Initial period
If 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).
Election
An election under paragraph (1) shall be made at such time and manner, and subject to such terms and conditions, as the Secretary may prescribe.
Time for assessing deficiency attributable to activity
If a taxpayer makes an election under paragraph (1) with respect to an activity, the statutory period for the assessment of any deficiency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined without extensions) for filing the return of tax under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such deficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment.
Pub. L. 91–172, title II, § 213(a)83 Stat. 571Pub. L. 92–178, title III, § 311(a)85 Stat. 525Pub. L. 94–455, title II, § 214(a)90 Stat. 1549Pub. L. 97–354, § 5(a)(23)96 Stat. 1694Pub. L. 99–514, title I, § 143(a)100 Stat. 2120Pub. L. 100–647, title I, § 1001(h)(3)102 Stat. 3352Pub. L. 113–295, div. A, title II, § 221(a)(36)128 Stat. 4042(Added , , ; amended , , ; , title XIX, § 1906(b)(13)(A), , , 1834; , , ; , , ; , , ; , , .)
Editorial Notes
Amendments
Pub. L. 113–2952014—Subsec. (e)(1). struck out “For purposes of the preceding sentence, a taxpayer shall be treated as not having engaged in an activity during any taxable year beginning before .” at end.
Pub. L. 100–6471988—Subsec. (e)(2). substituted “activity for 3 (or 2 if applicable)” for “activity for 2”.
Pub. L. 99–5141986—Subsec. (d). substituted “3” for “2” before “or more” in first sentence and “ ‘2’ for ‘3’ and ‘7’ for ‘5’ ” for “the period of 7 consecutive taxable years for the period of 5 consecutive taxable years” in second sentence.
Pub. L. 97–3541982—Subsec. (a). substituted “an S corporation” for “an electing small business corporation (as defined in section 1371(b))”.
Pub. L. 94–455, § 1906(b)(13)(A)1976—Subsecs. (d), (e)(3). , struck out “or his delegate” after “Secretary”.
Pub. L. 94–455, § 214(a)Subsec. (e)(4). , added par. (4).
Pub. L. 92–1781971—Subsec. (e). added subsec. (e).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Pub. L. 113–295section 221(b) of Pub. L. 113–295section 1 of this titleAmendment by effective , subject to a savings provision, see , set out as a note under .
Effective Date of 1988 Amendment
Pub. L. 100–647Pub. L. 99–514section 1019(a) of Pub. L. 100–647section 1 of this titleAmendment by effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, , to which such amendment relates, see , set out as a note under .
Effective Date of 1986 Amendment
Pub. L. 99–514section 151(a) of Pub. L. 99–514section 1 of this titleAmendment by applicable to taxable years beginning after , see , set out as a note under .
Effective Date of 1982 Amendment
Pub. L. 97–354section 6(a) of Pub. L. 97–354section 1361 of this titleAmendment by applicable to taxable years beginning after , see , set out as an Effective Date note under .
Effective Date of 1976 Amendment
Pub. L. 94–455, title II, § 214(c)90 Stat. 1549
Effective Date of 1971 Amendment
Pub. L. 92–178, title III, § 311(b)85 Stat. 526
Effective Date
Pub. L. 91–172, title II, § 213(d)83 Stat. 572