Question

Question 8 (1 point)

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?

1. Sadie will not recognize any taxable income as a result of her hobby.

2. Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year.

3. Sadie will lose at least $1,000 of her depreciation deduction for the current year.

4. If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.

Question 8 options:

	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 9 (1 point)

Michelle is a bank president and a weekend artist. She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling. Although she made about $6,000 last year from sales of artwork, she tells her friends she would do it for free. For the current tax year, she incurs expenses of $800 primarily for admission fees to flee markets and art fairs. The $800 is

1. deductible for AGI as a business expense.

2. not deductible.

3. deductible only because she has revenue from the activity.

Question 9 options:

	a. Only statement III is correct.
	b. Only statement II is correct.
	c. Statements I and II are correct.
	d. Statements II and III are correct.
	e. Statements I, II, and III are correct.

Question 10 (1 point)

Mike and Pam own a cabin near Teluride, Colorado. In the current year the cabin was rented for 8 days to friends. Mike and Pam used the cabin a total of 82 days during the same year. After allocating the expenses between personal and rental use, the following rental loss was determined:

Rental income	$700
Property taxes	(250)
Mortgage interest	(300)
Repairs and maintenance	(100)
Utilities	(150)
Rental loss	(100)

How should Mike and Pam report the rental income and expenses for last year?

Question 10 options:

	a. Report the $100 loss for AGI.
	b. Include the $700 in gross income, but no deductions are allowed.
	c. Only expenses up to the amount of $700 rental income may be deducted.
	d. Report the interest ($300) and taxes ($250) as itemized deductions and the other expenses for AGI.
	e. No reporting for the rental activity is necessary.

Question 11 (1 point)

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Christy purchases $1,000-worth of supplies from a local vendor. The supplies are delivered on March 29, of the current year. The supplies are fully used up by year end. Because of unusual circumstances, a bill for the supplies arrives from the vendor on January 10, of the next year, and is promptly paid. When can Christy deduct the expenses?

1. In the current tax year, if she is an accrual basis taxpayer.

2. In the next tax year, if she is a cash basis taxpayer.

Question 11 options:

	a. Only statement I is correct.
	b. Only statement II is correct.
	c. Both statements are correct.
	d. Neither statement is correct.

Answer 1

Answer 8.

Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Further as per IRS taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
In the above question, the gross income from painting (hobby) by Sadie is $7,000.

Eligible Expenses:

Interest on inventory Loans $ 800

Expenses in conducting business activities $5,200

Depreciation: $2,000

Total = 800+5200+2000=$8000

Hence Sadie can only claim $ 7,000 as eligible expenses since the hobby expenses cannot be allowed beyond the Hobby Income.

Accordingly in above case

a. Sadie will not recognize any taxable income as a result of her hobby: Incorrect. Sadie will recognise $7000 as Hobby Income.
b. Sadie can deduct the interest of $800 plus $6,200 of other hobby expenses for the year: Correct as the maximum deduction for expenses allowed in limited to income ie $7000

c. Sadie will lose at least $1,000 of her depreciation deduction for the current year. Correct as the as the maximum deduction for expenses allowed in limited to income ie $7000. If Sadie uses the standard deduction she will not receive any tax benefit from the

d. If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses: Correct.

Hence Statement e. is correct ie :Statements II, III, and IV are correct.