Question

Rebecca is a doctor with an AGI of $125,000 before consideration of income or loss from her dog breeding business. Her home is on 15 acres, 10 of which she uses to house the animals and provide them with ample space to play and exercise. Her records show the following related income and expenses for the current year:

Income from fees and sales	$2,500
Expenses:
Dog food	$4,000
Veterinary bills	3,500
Supplies	1,200
Publications and dues	350

1. How must Rebecca treat the income and expenses of the operation if the dog breeding business is held to be a hobby?

2. How would your answer differ if the operation were held to be a business?

Use current tax laws!

Answer 1

Requirement a: When a tax payer engages in dog breeding activity for personal enjoyment also known as hobby rather than to make profit then the income in the form of fees and sales of $2,500 from dog breeding activity would be reported as “other income” on page one of Form 1040. The related expenses of $9,050 are not deductible as personal expenses as summarized below.

Particulars	Amount	Amount
Income from fees and sales		$2,500
Expenses:
Dog food	$4,000
Veterinary bills	3,500
Supplies	1,200
Publications and dues	350
Total deductible expenses		$0
Taxable income from hobby		$2,500

Requirement b: When the taxpayer is able to prove that the dog-breeding activity is a business then the related revenues and expenses of $2,500 and $9,050 respectively would be reported on Schedule C and is allowed to deduct the net loss from the dog breeding business of $6,550 ($2,500 − $9,050) while calculating adjusted gross income (AGI).

Answer 2

a. Schedule C business income/(loss) = $0

     Other Income/(loss) = $2,500

     Expenses - (Schedule A - Misc. Deductions) = $0

b. Schedule C business income/(loss) = $(6,550)

     Other Income/(loss) = $0

     Expenses - (Schedule A - Misc. Deductions) = $0