Question

1. If a taxpayer has gains and losses from an activity, are they better off classifying the activity as a hobby or as a business? Explain why.

Mr. D works full-time as a systems analyst for a consulting firm. In addition, he sells plants that he raises himself in a greenhouse attached to his residence. During the past 5 years, the results from raising and selling the plants have been as follows: Year Net Profit (Loss) from Scenario 1:

	Scenario 1
Year 1	(2,000)
Year 2	(1,200)
Year 3	1,000
Year 4	2,500
Total Years 1-4	300
Year 5	(500)

2. Please create a scenario (Scenario 2) where the cumulative profits in years 1-4 are still $300 but the taxpayer would be in a better position regarding year 5 losses.

	Scenario 1	Scenario 2
Year 1	(2,000)
Year 2	(1,200)
Year 3	1,000
Year 4	2,500
Total Years 1-4	300	300
Year 5	(500)	(500)

3. Comment on your answer to 2 above. Why is Scenario 2 better for the taxpayer? You may also show your erudition by citing, referencing, and attaching additional sources

Answer 1

1) One needs to understand If his hobby is a recreational pursuit or a profit-making endeavor. Earning a living doing something one loves is a natural goal, but he must be clear about his intentions to claim expenses.

The IRS defines a hobby as an activity:

• We do purely for the love of it, regardless of the cost.
• And do not expect profit in return.

This doesn't mean you're prohibited from earning any money. Generally speaking,hobby is a business if:

• Some or all of your income comes from the hobby. For example, you sell handmade candy on an e-commerce store, and the earnings account for half of your annual income.
• Your hobby experiences profits and losses. For example, you earn significant profits from Valentine's Day sales, but you've spent too much on a flavor of Halloween candy that didn't sell.

If you are taking pictures, playing the cello, making crafts, training horses, or any other number of various activities to make a profit, then the IRS determines, for tax purposes, you are running a for-profit business, not a hobby.

Here are nine questions the IRS has provided to determine whether your activity is engaged in for a profit (e.g. a business):

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Beginning in 2018, the IRS doesn't allow you to deduct hobby expenses from hobby income. you must claim all hobby income and are not permitted to reduce that income by any expenses.