Question

Bill paints portraits and treats the activity as a hobby. This year he had $2,500 of income from painting sales, and spent the following amounts:

Easel $   400

Brushes $   550

Paint $1,300

Canvases $   300

Advertising $   175

Studio Rental $   600

Assuming all the supplies were used up in the paintings he sold, how should Bill report his hobby income and expense on this year’s tax return?

Group of answer choices

Include $2,500 in income, deduct $ - 0 -

Do not include any of the income or expenses

Include $900 in income, deduct $ - 0 –

Include $2,500 in income, deduct $2,500 for AGI

Include $900 in income, deduct $175

Answer 1

Per IRS, the taxpayers must report the income on their tax return even if it is made from a Hobby.

Hence, Bill would report the $2,500 income from painting sales on his tax return.

Also, Bill would be eligbile to deduct ordinary and necessary Hobby expenses for the activity upto the Hobby.

Based on the above explanations, Hobby would recognize income of $2,500 on his tax return. Additionally Hobby would be eligible to deduct $2,500 on his AGI on account of the hobby expenses. Any expense in excess of the Hobby income cannot be deducted by Bill. Since the total of all the supplies(Easel, Brushes, pain, canvases, etc) used by Bill for painting exceed $2,500 , he is allowed the full deduction upto $2,500.

Hence, the correct answer is Option D - Includes $2,500 in income, deduct $2,500 for AGI.

Option A is incorrect. Bill is allowed to deduct the hobby expenses to the extent of hobby income and as such this is not a valid answer.

Option B is incorrect. Bill should report his hobby income and deduct his hobby expesnes to the extent of the hobby income.

Option C is incorrect. Bill should report his entire income of $2,500 and not just $900. Similary he can deduct hobby expenses upto $2,500. Hence this is incorrect.

Option D is correct. Include $2,500 in income , deduct $2,500 for AGI. Even though the total hobby expenses is greater than $2,500 , Bill should deduct only upto $2,500 (upto Hobby Income)

Option E is incorrect. Bill should report the entire Hobby income of $2,500 as against $900 mentioned in the option.