Question 1

Abigail's hobby is sculpting. During the current year, Abigail sold three of her sculptures for a total of $3,200. Her related expenses include $1,500 in utilities, $1,200 in supplies and $900 in depreciation. Of the total expenses incurred, Abigail may deduct

Accepted Answer

C)Since the activity is classified as a hobby,hobby expenses are deductible to the extent of hobby income of $3,200.Further,they are deducted in a specific order-those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation).

Question 2

Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.

Accepted Answer

The answer of Explain the rules for determining whether a...

Question 3

Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. Juanita does not itemize deductions. On her tax return, she should

Accepted Answer

C)A deduction for hobby expenses is only available to taxpayers itemizing deductions.

Question 4

Nikki is a single taxpayer who owns a vacation cottage on the lake. During the year, she rented it for $2,000 for 14 days, lived in it for 56 days, and left it vacant the remainder of the year. The year's expenses amounted to $5,000 interest expense, $800 property taxes, $1,500 utilities and maintenance, and $2,400 depreciation. Using the IRS method of allocating expenses, how much of the property-related expenses will be deductible for AGI?

Accepted Answer

The answer of Nikki is a single taxpayer who owns...

Question 5

Gabby owns and operates a part-time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year-end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills?

Accepted Answer

Gabby should pay the bills next year. The expenses are not deductible in the current year because they were not paid or incurred by the end of the year. However, since she is projecting a small profit for the current year and only had small profits in the past, it may be beneficial for her to pay the bills next year when she may have a higher profit and thus a higher tax rate. This will allow her to maximize her tax savings.

Question 6

Lindsey Forbes, a detective who is single, operates a small pottery activity on a part-time basis. This year she reported the following income and expenses from this activity:
 $\begin{array}{lr}
\text { Revenue from sale of pottery } & \$ 9,000 \
\text { Depreciation on potter's wheel } & (3,000) \
\text { Property taxes on shed where she does pottery } & (1,200) \
\text { Supplies used such as clay, etc. } & (6,500)
\end{array}$ In addition, she had salary of $70,000 and itemized deductions, not including expenses listed above, of $6,800.
a. What is the amount of Lindsey's taxable income assuming the activity is classified as a hobby?
b. What is the amount of Lindsey's taxable income assuming the activity is classified as a trade or business?

Accepted Answer

The answer of Lindsey Forbes, a detective who is single,...

Question 7

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as

Accepted Answer

The houseboat is being rented for 280 days out of the year, which qualifies it as rental property. Expenses in excess of income can be deducted, but the net income or loss is subject to the passive activity rules.

Question 8

During the current year, Paul, a single taxpayer, reported the following items:
 $\begin{array}{ll}
\text { Salary } & \$ 75,000 \
\text { Interest on original loan incurred to purchase home } & 14,000 \
\text { Taxes on home } & 3,500 \
\text { Revenue from hobby } & 5,000 \
\text { Interest on home equity loan incurred to purchase hobby assets } & 800 \
\text { Exnenses of hobby } & 8.500
\end{array}$  Compute Paul's taxable income for the year.

Accepted Answer

The answer of During the current year, Paul, a single...

Question 9

In 2016 the IRS audits a company's 2014 tax return and determines that the president's salary was excessive and disallowed $100,000 of the salary deduction. Under the terms of the hedge (payback) agreement in the corporate bylaws, the president repays $100,000 of her salary to her employer in 2016. The president will amend her 2014 tax return to get a refund of the taxes paid on the excess salary.

Accepted Answer

The answer of In 2016 the IRS audits a company's...

Question 10

Diane, a successful accountant with an annual income of $150,000, also enjoys raising and training race horses, an activity in which she spends about 10 hours per week. Over the past five years her winnings from races have amounted to $20,000. She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week. Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.

Accepted Answer

The answer of Diane, a successful accountant with an annual...

Question 11

Discuss tax planning considerations which a taxpayer may use to possibly avoid classification of an activity as a hobby.

Accepted Answer

The answer of Discuss tax planning considerations which a taxpayer...

Question 12

Ola owns a cottage at the beach. She and her family use the property for 30 days during the summer season and rent it to unrelated parties for 60 days. The rental receipts amount to $8,000. Total costs of operating the property are as follows:
 $$\begin{array} { | l | r | } 
\hline \text { Mortgage interest } & \$ 13,000 \
\hline \text { Property taxes } & 5,000 \
\hline \text { Utilities } & 2,000 \
\hline \text { Insurance } & 1,000 \
\hline \text { Maintenance } & 600 \
\hline
\end{array}$$ In addition, potential depreciation expense is $9,000.
a. Is the cottage subject to the vacation home rental limitations of IRC Sec. 280A?
b. How much of expenses can Ola deduct?

Accepted Answer

The answer of Ola owns a cottage at the beach....

Question 13

Kyle drives a race car in his spare time and on weekends. His records regarding this activity reflect the following information for the year. $$\begin{array} { | l | r | } 
\hline \text { Income } & \$ 7,800 \
\hline \text { Entry fees } & 2,100 \
\hline \text { Depreciation on car } & 1,700 \
\hline \text { Gasoline } & 1,000 \
\hline \text { Interest on home equity loan for race car } & 800 \
\hline \text { Insurance premiums } & 2,500 \
\hline
\end{array}$$ What is the allowable deduction (before any AGI limitation) for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions?

Accepted Answer

The answer of Kyle drives a race car in his...

Question 14

Margaret, a single taxpayer, operates a small pottery activity in her spare time. During the current year, she reported the following income and expenses from this activity which is classified as a hobby:
 $\begin{array}{lr}
\text {Revenue from sale of pottery }&\$4,000\
\text {Depreciation on potter's wheel }&(3,000)\
\text {Property taxes on shed where she does work }&1,100\
\text {Supplies used such as clay, etc.}&6,500\
\end{array}$
 In addition, she had salary of $75,000 and itemized deductions, not including those listed above, of $2,200.
What is the amount of her taxable income?

Accepted Answer

The answer of Margaret, a single taxpayer, operates a small...

Question 15

During the current year, Jack personally uses his summer home for 25 days. He also rented his summer home to a group of vacationers for 12 days for $600 per day. How much income does Jack report from the rental of his summer home?

Accepted Answer

The answer of During the current year, Jack personally uses...

Question 16

The Super Bowl is played in Tasha's home town. Tasha moves out of her house for 10 days and stays with her parents. She rents her house for a very high fee to a crew from ESPN. With respect to this rental activity, Tasha will

Accepted Answer

The answer of The Super Bowl is played in Tasha's...

Question 17

Anita has decided to sell a parcel of land she had been holding for investment purposes. She purchased the land 5 years ago for $10,000. The current fair market value is $6,000. Anita's sister, Kathy, is interested in buying the land as is Anita's friend, Marcia. What tax issues should Anita consider when deciding to whom the land should be sold?

Accepted Answer

The answer of Anita has decided to sell a parcel...

Question 18

Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo: $$\begin{array} { | l | r | } 
\hline \text { Expense } & { \text { Amount } } \
\hline \text { Mortgage interest } & \$ 5,000 \
\hline \text { Property taxes } & 3,500 \
\hline \text { Utilities } & 2,500 \
\hline \text { Insurance } & 1,800 \
\hline \text { Depreciation } & 11,000 \
\hline
\end{array}$$ Using the court's method of allocating expenses, the amount of depreciation that Mackensie may take with respect to the rental property will be

Accepted Answer

The court's method allocates expenses based on the ratio of rental days to total days of use. The condo is rented for 77 days and used for 23 days, totaling 100 days. The depreciation allocated to rental use is (77/100) * $11,000 = $8,470. However, since the rental income is $10,900 and total expenses (excluding depreciation) are $12,800, the depreciation is limited to the rental income minus other expenses, which is $10,900 - $5,000 - $3,500 - $2,500 - $1,800 = $1,044.

Question 19

Abby owns a condominium in the Great Smokey Mountains. During the year, Abby uses the condo a total of 21 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500. Abby incurs the following expenses: $$\begin{array} { | l | r | } 
\hline \text { Expense } & { \text { Amount } } \
\hline \text { Mortgage interest } & \$ 4,100 \
\hline \text { Property taxes } & 1,900 \
\hline \text { Utilities } & 2,200 \
\hline \text { Insurance } & 1,200 \
\hline \text { Depreciation } & 10,000 \
\hline
\end{array}$$ Using the IRS method of allocating expenses, the amount of depreciation that Abby may take with respect to the rental property will be

Accepted Answer

The IRS method of allocating expenses is based on the ratio of rental days to total days of use. In this case, the condo was rented for 79 days and Abby used it for 21 days, for a total of 100 days. Therefore, the ratio of rental days to total days of use is 79/100. This means that Abby may deduct 79% of the depreciation expense, which is $10,000 x 79% = $7,900.

Question 20

Lloyd purchased 100 shares of Gold Corporation common stock for $20 per share for a total basis of $2,000. Several years later, on May 1 of the current year, Lloyd sells all 100 shares for $500. On May 29 of the current year, Lloyd purchases 30 shares of Gold Corporation common stock for $180.
a. How much loss is Lloyd allowed to recognize?
b. What is Lloyd's basis in the 30 new shares?

Accepted Answer

The answer of Lloyd purchased 100 shares of Gold Corporation...

Quiz 21: Deductions and Losses