Question

Hobby Losses. Chuck, a dentist, raises prize rabbits for breeding and showing purposes. Assume that the activity is determined to be a hobby. During 2019, the activity generates the following items of income and expense:

Item                                                                   Amount

Sale of rabbits for breeding stock                    $800

Prizes and awards                                              (300)

Property taxes on rabbit hutches                      (200)

Feed                                                                     (600)

Veterinary fees                                                    (500)

Depreciation on rabbit hutches                         (250)

1. What is the total amount of income and deductions Chuck should report for 2019 with respect to the rabbit raising activities?
2. Identify which expenses may be deducted and indicate whether they are deductions for or from AGI.
3. By what amount is the cost basis of the rabbit hutches to be reduced for the year?

Answer 1

a. Since this activity is a hobby, Chuck can only deduct a total of $1,100 of the expenses related to the hobby activity. This amount is limited to the income Chuck realizes from the hobby, and is calculated as follows:

b. All of the expenses are deductions from AGI since the activity is a hobby. If Chuck itemizes his deductions, all of the property taxes may be deducted and all but $200 of the feed and veterinary expenses may be deductible subject to the 2% of AGI limit on miscellaneous itemized deductions. No depreciation is allowed. These expenses, of course, are deductible only if the sum of Chuck’s itemized deductions exceeds the standard deduction.

c. -0-. None of the depreciation was deducted so the basis of the hutches is not reduced.