It's a little more complicated than that.

The "three out of five" rule is part of Internal Revenue Code Section 183 (commonly called the "Hobby Loss Rule") which is a determinant of whether an activity has a "profit making motive". In general, you can only deduct "hobby" losses to the extent of gains - i.e. you can deduct your racing expenses against your winnings.

This would prevent anyone who has a regular day job from deducting regatta expenses from their regular income.

However, if you are a business owner (like Karl), who have an entity engaged in a "for profit activity" (cabinet shop), you can deduct expenses qualified under IRC Section 162 (ordinary and neccessary - like advertising)from your business income without regard to the "3 of 5" rule. However, the quantity of those dedections may come under scrutiny in the event of an audit (was the amount of advertising justified for the size of the business, etc.). For example - if advertising was the largest expense line item for a cabinet shop, it would certainly raise some questions.

As always, keep meticulous records and receipts when dealing with the IRS.