Question

In his spare time, Fred likes to restore old furniture and sell it to his friends. He is a lawyer by trade. During 2017, he sells $500 worth of furniture and has $21,000 worth of expenses. Which one of the following is true?

a.Fred may deduct all $21,000 of his expenses because Fred is engaged in a trade or business.

b.Fred may deduct all $21,000 of his expenses because Fred is engaged in a hobby.

c.Fred cannot deduct any of the expenses because he is engaged in a hobby.

d.Fred's deductions are limited to the income from selling furniture because he is engaged in a hobby.

e.None of these choices are correct.

Answer 1

d.Fred's deductions are limited to the income from selling furniture because he is engaged in a hobby.

Step-by-step explanation:

Fred will only deduct the $500 sales from the furniture hobby the other expenses aren't deductible as they aren't backed for occasional sales from their hobby.

It is important to notice there is a another limit to how much a person can deduct from this type of activities which is 2% of the gross income

Therefore if a person makes 100,000 gross income per year

it can deduct a maximum expense of 2%.