ACC 307 Federal Taxation

Accounting
Tutor: None Selected Time limit: 1 Day

Suggest as least three (3) methods that the IRS could use in order to determine if hobby and trade expenses meet such conditions. Provide specific examples of such methods.

Analyze at least two (2) of the IRS guidelines on the deductibility of expense related to vacation homes in order to determine the fundamental way in which taxpayers are likely to abuse them, and ascertain the most effective means for the IRS to detect taxpayer abuse.

Jul 16th, 2015

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The Hobby Loss Rule

The key to whether you can or can’t write off your hobby comes down to what’s known as the IRS’s “hobby loss rule.”

Basically, you can’t deduct your expenses if the hobby is “not engaged in for profit.” In other words, if you pursue a hobby — say, collecting old Lionel trains or doing needlepoint — purely for pleasure, you can’t write off anything you spend on the pastime.

If, however, you try to make money from a passion you pursue while holding down a full-time job that’s your main source of income, you may be able to write off some of your expenses. “What’s a hobby to one person could be a business — and a serious one — to someone else,” Charney says. “It all depends on your profit motive.”

How Much You Can Claim

If you want to write off hobby expenses, the size of your deduction depends on how much money the hobby brings in and how its expenses compare with your total income. (You can’t deduct losses from a hobby.)

Here’s the math: If you make money from a hobby — selling jewelry at the local craft fair once a year, for instance — you may be able to claim your expenses as miscellaneous deductions on your 1040, up to the amount you earned from the hobby. But the IRS only lets you claim miscellaneous deductions exceeding 2 percent of your adjusted gross income. So it’s possible that your hobby expenses won’t be high enough to cross the deductibility threshold.

Let’s say your adjusted gross income was $80,000 and your hobby brought in $10,000 but cost you $4,000. In this case, you can write off only $2,400 of the expenses (that’s the difference between the $4,000 in expenses and the $1,600 you’d get multiplying $80,000 by 2 percent).

An Alternative Way To Write Off a Hobby

But tax experts say there’s a better way to write off your hobby, if you’re eligible: Declare your pastime a business, and file a Schedule C (Profit or Loss From a Business) for it.

This way, you can deduct other business expenses — like equipment, raw materials, business-related travel and trade association dues — without having to meet the 2 percent miscellaneous deduction threshold. If you lost money on the business, you can write off the loss against your other income from your job or your investments, because it’s not considered a hobby.


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Jul 16th, 2015

What about the trade expenses and the second question?

Jul 16th, 2015

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