Sadie is a full time nurse and a part time painter.Her painting qualifies as a hobby.Her gross income from painting is $7,000.Her expenses include $800 of interest on inventory loans,$5,200 of expenses in conducting business activities,and $2,000 of depreciation of equipment.Which of the following statements about Sadie's hobby activity is/are correct?
I.Sadie will not recognize any taxable income as a result of her hobby.
II.Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year.
III.Sadie will lose at least $1,000 of her depreciation deduction for the current year.
IV.If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.

A)Statements I and II are correct.
B)Statements II and III are correct.
C)Statements III and IV are correct.
D)Statements I,II,and III are correct.
E)Statements II,III,and IV are correct.

Question

Sadie is a full time nurse and a part time painter.Her painting qualifies as a hobby.Her gross income from painting is $7,000.Her expenses include $800 of interest on inventory loans,$5,200 of expenses in conducting business activities,and $2,000 of depreciation of equipment.Which of the following statements about Sadie's hobby activity is/are correct?
I.Sadie will not recognize any taxable income as a result of her hobby.
II.Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year.
III.Sadie will lose at least $1,000 of her depreciation deduction for the current year.
IV.If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.
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A)Statements I and II are correct.
B)Statements II and III are correct.
C)Statements III and IV are correct.
D)Statements I,II,and III are correct.
E)Statements II,III,and IV are correct.

Quizplus · Accepted Answer

Statement I is incorrect because even though Sadie's painting qualifies as a hobby, she still needs to report the $7,000 gross income on her tax return as taxable income.

Statement II is correct because Sadie can deduct the interest of $800 and the other hobby expenses of $5,200 on her tax return, up to the amount of her hobby income of $7,000. This will result in a net loss of $1,000.

Statement III is correct because Sadie can only deduct the depreciation of equipment up to the amount of her hobby income, which is $7,000. Therefore, she will lose at least $1,000 of her depreciation deduction for the current year.

Statement IV is correct because if Sadie uses the standard deduction instead of itemizing her deductions, she will not receive any tax benefit from her hobby expenses. The standard deduction for 2021 for a single taxpayer is $12,550, which is more than Sadie's total expenses of $6,000 ($800 + $5,200).

Sadie Is a Full Time Nurse and a Part Time