For an activity classified as a hobby,the expenses are categorized as follows: (1)Amounts deductible under other Code sections without regard to the nature of the activity,such as property taxes and home mortgage interest.
(2)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).
(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).
If these expenses exceed the gross income from the activity and are thus limited,the sequence in which they are deductible is:

Question

Quizplus · Accepted Answer

According to the tax code, expenses for hobbies are only deductible up to the amount of income generated from the hobby. If the expenses exceed the income, the expenses are deductible in the following order: (1) expenses deductible under other Code sections without regard to the nature of the activity, (2) expenses that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit, and (3) expenses deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjustable basis. Therefore, the correct sequence in which the expenses may be deducted is (1) 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, such as maintenance, utilities, and supplies, and (2) amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit, such as depreciation, amortization, and depletion. Therefore, choice B is the correct answer.

For an Activity Classified as a Hobby,the Expenses Are Categorized