Question 1

Diane, a successful accountant with an annual income of $150,000, also enjoys raising and training race horses, an activity in which she spends about 10 hours per week. Over the past five years her winnings from races have amounted to $20,000. She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week. Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.

Accepted Answer

The answer of Diane, a successful accountant with an annual...

Question 2

For the years 2014 through 2018 (inclusive) Mary, a best- selling author, has been involved in operating an antique store. In 2014, 2015 and 2016 her revenue exceeded the expenses from the activity. In 2017 and 2018, the antique store generated a loss. Which statement is correct?

Accepted Answer

The IRS presumes an activity is a business if it shows a profit in at least three of the last five years. Since Mary's antique store was profitable in 2014, 2015, and 2016, it is presumed to be a business. However, the IRS can challenge this presumption and prove it is a hobby.

Question 3

During the current year, Jack personally uses his summer home for 25 days. He also rented his summer home to a group of vacationers for 12 days for $600 per day. How much income does Jack report from the rental of his summer home?

Accepted Answer

The answer of During the current year, Jack personally uses...

Question 4

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as

Accepted Answer

Since the houseboat is rented for more than 14 days and used personally for less than 10% of the rental days, it is classified as rental property for tax purposes.

Question 5

Which of the following factors is not used to determine whether an activity is a hobby or a business?

Accepted Answer

The answer of Which of the following factors is not...

Question 6

Explain the rules for determining whether a home is considered a rental property or a vacation home and the tax consequences of this classification.

Accepted Answer

The answer of Explain the rules for determining whether a...

Question 7

Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. On her tax return, she should

Accepted Answer

Hobby income must be reported, but hobby expenses are not deductible.

Question 8

Anita has decided to sell a parcel of land she had been holding for investment purposes. She purchased the land 5 years ago for $10,000. The current fair market value is $6,000. Anita's sister, Kathy, is interested in buying the land as is Anita's friend, Marcia. What tax issues should Anita consider when deciding to whom the land should be sold?

Accepted Answer

The answer of Anita has decided to sell a parcel...

Question 9

The Super Bowl is played in Tasha's home town. Tasha moves out of her house for 10 days and stays with her parents. She rents her house for a very high fee to a crew from ESPN. With respect to this rental activity, Tasha will

Accepted Answer

If a taxpayer rents out their personal residence for fewer than 15 days during the year, they are not required to report the rental income, and they can still deduct mortgage interest and property taxes as itemized deductions.

Question 10

Gabby owns and operates a part- time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year- end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills?

Accepted Answer

The answer of Gabby owns and operates a part- time...

Question 11

In 2018 the IRS audits a company's 2016 tax return and determines that the president's salary was excessive and disallowed $100,000 of the salary deduction. Under the terms of the hedge (payback) agreement in the corporate bylaws, the president repays $100,000 of her salary to her employer in 2018. The president will amend her 2016 tax return to get a refund of the taxes paid on the excess salary.

Accepted Answer

The president cannot amend her 2016 tax return to get a refund for the taxes paid on the excess salary. Instead, she can claim a deduction for the repayment on her 2018 tax return under the "claim of right" doctrine.

Question 12

Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo:  Using the court's method of allocating expenses, the amount of depreciation that Mackensie may take with respe the rental property will be

Accepted Answer

The answer of Mackensie owns a condominium in the Rocky...

Question 13

Nikki is a single taxpayer who owns a vacation cottage on the lake. During the year, she rented it for $2,000 for 14 days, lived in it for 56 days, and left it vacant the remainder of the year. The year's expenses amounted to $5,000 interest expense, $800 property taxes, $1,500 utilities and maintenance, and $2,400 depreciation. Using the IRS method of allocating expenses, how much of the property- related expenses will be deductible for AGI?

Accepted Answer

Since Nikki rented the property for less than 15 days, the rental income is not taxable, and the related expenses are not deductible for AGI.

Question 14

Lloyd purchased 100 shares of Gold Corporation common stock for $20 per share for a total basis of $2,000. Seve years later, on May 1 of the current year, Lloyd sells all 100 shares for $500. On May 29 of the current year, Lloyd purchases 30 shares of Gold Corporation common stock for $180.
a. How much loss is Lloyd allowed to recognize?
b. What is Lloyd's basis in the 30 new shares?

Accepted Answer

The answer of Lloyd purchased 100 shares of Gold Corporation...

Question 15

During the current year, Paul, a single taxpayer, reported the following items:

Accepted Answer

The answer of During the current year, Paul, a single...

Question 16

For the years 2014 through 2018 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2017 and 2018 did his revenue exceed the expenses from the activity. Which statement is correct?

Accepted Answer

The IRS presumes an activity is a hobby if it does not make a profit in at least 3 of the last 5 years. Since Max only made a profit in 2 of the 5 years, it is presumed to be a hobby, but he can provide evidence to prove it is a business.

Question 17

Discuss tax planning considerations which a taxpayer may use to possibly avoid classification of an activity as a hobby.

Accepted Answer

The answer of Discuss tax planning considerations which a taxpayer...

Question 18

Abby owns a condominium in the Great Smokey Mountains. During the year, Abby uses the condo a total of 21 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500. Abby incurs the following expenses:  Using the IRS method of allocating expenses, the amount of depreciation that Abby may take with respect to the property will be

Accepted Answer

The answer of Abby owns a condominium in the Great...

Question 19

Ola owns a cottage at the beach. She and her family use the property for 30 days during the summer season and to unrelated parties for 60 days. The rental receipts amount to $8,000. Total costs of operating the property are as follows:  In addition, potential depreciation expense is $9,000.
a. Is the cottage subject to the vacation home rental limitations of IRC Sec. 280A?
b. How much of expenses can Ola deduct?

Accepted Answer

The answer of Ola owns a cottage at the beach....

Question 20

Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties. Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies. Kelsey takes the standard deduction each year. The net effect of the cupcake activity on Kelsey's taxable income is

Accepted Answer

The answer of Kelsey enjoys making cupcakes as a hobby...

Quiz 16: Tax Deductions and Travel Expenses for Employees and Self-Employed Individuals