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?
A)before year-end to get the current year deduction
B)next year
C)split into $6,000 this year and $1,000 next year
D)It does not matter when she pays the bills.The work was performed this year,so the costs will be deducted this year.

Question

Quizplus · Accepted Answer

Gabby should wait and pay the bills next year. Since she is currently showing a small profit of $6,000, deducting the $7,000 in repair expenses this year would result in a net loss. This could potentially reinforce the IRS's position that her art gallery is a hobby rather than a business. Waiting until next year to pay the bills would result in a smaller net profit, but it would still be taxable income and help to establish the gallery as a legitimate business.

Gabby Owns and Operates a Part-Time Art Gallery,now in Its