Question

Alex, who is single, conducts an activity in 2019 that is appropriately classified as a hobby. The activity produces the following revenues and expenses: Revenue $18,000 Property taxes 3,000 Materials and supplies 4,500 Utilities 2,000 Advertising 5,000 Insurance 750 Depreciation 4,000 Without regard to this activity, Alex's AGI is $42,000. Determine the amount of income Alex must report and the amount of the expenses he is permitted to deduct. Assume Alex itemizes his deductions.

Answer 1

The solution to the given problem is done below.

Step-by-step explanation:

Alex must report the $18,000 as revenues. All of the property taxes of $3,000 can be deducted. Because the remaining expenses of $16,250 exceed the balance of $15,000 ($18,000 revenues − $3,000 property taxes), the $15,000 is deductible as follows:

Materials and supplies $ 4,500

Utilities 2,000

Advertising 5,000

Insurance 750

Depreciation (because depreciation is sequenced

last, only $2,750 of the $4,000 is eligible) 2,750

Total deductible expenses $15,000

These expenses of $15,000 are classified as miscellaneous itemized deductions and will be subject to the 2%-of-AGI floor. Hence, $1,200 [($42,000 + $18,000) × 2%] of these expenses is disallowed.

Other AGI $42,000

Revenues from hobby $18,000

Less: Expenses

Property taxes (3,000)

Miscellaneous itemized

deduction ($15,000 − $1,200) (13,800)

Less: Personal exemption (4,050)

Taxable income $39,150