Question

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?

Answer 1

1) One must perceive If his hobby may be a recreational pursuit or a profit-making endeavor. Earning a living doing one thing one loves may be a natural goal, however he should be clear regarding his intentions to say expenses.

The federal agency defines a hobby as Associate in Nursing activity:

We do strictly for the love of it, notwithstanding the price.
And don't expect profit reciprocally.
This doesn't mean you are prohibited from earning any cash. typically speaking,hobby may be a business if:

Some or all of your financial gain comes from the hobby. as an example, you sell overhand candy on Associate in Nursing e-commerce store, and also the earnings account for half your annual financial gain.
Your hobby experiences profits and losses. as an example, you earn vital profits from Saint Valentine's Day sales, however you've got spent an excessive amount of on a flavor of Halloween candy that did not sell.
If you're taking footage, taking part in the string, creating crafts, coaching horses, or the other variety of varied activities to create a profit, then the federal agency determines, for tax functions, you're running a for-profit business, not a hobby.

Here ar 9 queries the federal agency has provided to work out whether or not your activity is engaged certain a profit (e.g. a business):

Does the time and energy place into the activity indicate Associate in Nursing intention to create a profit?
Do you rely upon financial gain from the activity?
If there ar losses, ar they thanks to circumstances on the far side your management or did they occur within the start-up part of the business?
Have you modified ways of operation to enhance profitability?
Do you have the data required to hold on the activity as a triple-crown business?
Have you created a profit in similar activities within the past?
Does the activity create a profit in some years?
Do you expect to create a profit within the future from the appreciation of assets employed in the activity?
Beginning in 2018, the federal agency does not permit you to deduct hobby expenses from hobby financial gain. you want to claim all hobby financial gain and don't seem to be allowable to cut back that financial gain by any expenses.

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