Question

Problem 3-29
Hobby Losses (LO 3.13)

Lew is a practicing CPA who decides to raise bonsai as a business. Lew engages in the activity and has the following revenue and expenses:

Sales $ 5,000 Depreciation on greenhouse 10,000 Fertilizer, soil, pots 1,500

a. Select either "Yes" or "No" to indicate which of the following are factors the IRS will consider when evaluating whether the activity is a hobby.

1. Whether the activity is conducted like a business 2. The expertise of the taxpayer 3. The time and effort expended 4. Previous success of the taxpayer in different activities 5. Income and loss history from the activity 6. Losses are due to circumstances beyond the taxpayer's control or are normal in the start-up phase 7. The taxpayer changes the method of operation to improve profitability 8. The dependence on the activity for the taxpayer's income 9. Whether a future profit can be expected from the appreciation of the assets used in the activity

b. If the activity is deemed to be a regular business, what is the amount of Lew's loss from the activity?
$

c. If the activity is deemed to be a hobby, what is the amount of Lew's expenses (if any) from the activity that may be deducted?
$

Answer 1

Solution:

a) Selecting either "Yes" or "No" to indicate which of the following are factors the IRS will consider when evaluating whether the activity is a hobby:

1)	whether the activity is conducted like a business	Yes
2)	The expertise of the taxpayer	Yes
3)	The time and effort expended	Yes
4)	Previous success of the taxpayer in different activities	Yes
5)	Income and loss history from the activity	Yes
6)	Losses are due to circumstances beyond the taxpayer's control or are normal in the start-up phase	No
7)	The taxpayer changes the method of operation to improve profitability	No
8)	The dependence on the activity for the taxpayer's income	Yes
9)	Whether a future profit can be expected from the appreciation of the assets used in the activity	No

b) Calculation of the Amount of Lew's Loss from the Activity:

Therefore, the Amount of Lew's Loss from the Activity is -$6,500.

c) Calculation fo the Lew's Expenses from the Activity that may be Deducted:

The Amount of Loss is Limited to the Amount of Income from the hobby. The $5,000 of bonsai sales has been included in gross income, where the $5,000 of expenses is miscellaneous itemized deductions subject to the 2% of AGI limitation.