We often hear that in order to be considered as operating for a profit, we need to show a profit in 3 of 5 years. Please study the example below, which illustrates the IRS’s slightly different approach. If you are audited, the example below shows how the IRS will calculate the years of profit and years of loss.
This calculation applies to partnerships, S-corporations and sole proprietorships, all of which can be LLCs.
| Example 1 profits and losses | |
| Tax Year | Gain or (Loss) |
| 2000 | (30,000) |
| 2001 | 5000 |
| 2002 | (60,000) |
| 2003 | 2,000 |
| 2004 | 5,000 |
| 2005 | (70,000) |
| 2006 | 3,000 |
| 2007 | (63,000) |
The first 5 year presumption period begins with the first profit year of 2001, but the benefit of the presumption does not begin until the third profit year of 2004. The presumption is not available for 2001 through 2003 because it does not apply until the third profit year. The presumption is available during the first presumption period only in 2004 and 2005. The second five year presumption period begins with the 2003 profit year and runs through 2007. The presumption applies to the third profit year of 2006 and will be of benefit to the taxpayer for 2006 and 2007.
