Question

Stewie, a single taxpayer, operates an activity as a hobby. Brian, a different taxpayer, operates a similar activity as a bona fide business. Stewie’s gross income from his activity is $5,000 and his expenses are $6,000. Brian’s gross income and expenses are coincidentally the same as Stewie. Neither Stewie nor Brian itemize but both have other forms of taxable income. What is the impact on taxable income for Stewie and Brian from these activities?

a. Stewie will report $0 income and Brian will report a $1,000 loss.

b. Stewie will report $5,000 income and $5,000 as a miscellaneous itemized deduction and Brian will report a $1,000 loss.

c. Stewie and Brian will report $0 taxable income.

d. Stewie and Brian will report a $1,000 loss.

e. Stewie will report a $1,000 loss and Brian will report $5,000 income.

Please show all calculations and explain why you chose your answer. Thank you.

Answer 1

Ans - STEWIE WILL REPORT $0 INCOME AND BRIAN WILL REPORT A $1000 LOSS. (OPTION A)

From the above we see that even though both Brian and Stewie are incurring same value loss of $1000 each ($5000 income - $6000 expense = $1000 loss), yet the reason for loss is different. When a person incurs expenses with the motive of earning profit and ends up suffering losses than IRS recognizes that loss because the main motive of investment was to earn profit in business as is carried on by Brian. But what stewie is doing is different from business. He is also incurring loss but it is a hobby for him and he never invested in it with the motive of earning profit, Thus His income cannot be reported but since Brian is carrying on business, therefore he can report his Loss to IRS. IRS does not recognize Hobby loss unless there was profit motive which is not so in case of Stewie so therefore he cannot report his Gross income or Loss incurred.