For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion).
(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.
(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).
For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:
A)(1), (2), (3).
B)(1), (3), (2).
C)(2), (3), (1).
D)(2), (1), (3).
E)(3), (2), (1).

Question

Quizplus · Accepted Answer

For tax years before 2018, hobby expenses were deductible in the order of: (2) amounts deductible regardless of profit motive, (3) amounts deductible if engaged for profit but not affecting basis, and (1) amounts affecting adjusted basis.

For an Activity Classified as a Hobby, the Expenses Are