Effect on AGI. C is a successful attorney and stock car racing enthusiast. this year she decided to quit watching the races and start participating. She purchased a car and entered several local races. During the year, she had the following recepits and disbursements related to the racing activities:
Race winnings 3000
property taxes 2800
fuel, supplies , maintenance 1000
her AGI exclusive of any items related to the racing activities is 100,000
a) Indicate the tax consequences assuming the activity is not considered to be a hobby.
b) assuming the activity is treated as hobby, what are the tax consequences
c) assuming the activity is deemed a hobby and property taxes are 4000, what are the tax consequences
d) what is the critical factor in determing whether an activity is a hobby or a business
e) what circumstances suggest the activity is a business rather than a hobby
7-40 Classification of Deductions. M works as the captain of a boat. His income for the year is $20,000. During the year, he purchased a special uniform for $100. Indicate the amount of the deduction and whether it is for or from A.G.I. for the following situations: a. M’s boat is a 50-foot yacht, and he operates his business as a sole proprietorship (i.e., he is self-employed). b. M is an employee for Yachts of Fun Inc. c. M is an employee for Yachts, which reimbursed him $70 of the cost (included in his income on Form W-2).
7-56 Classification and Deductibility. In each of the following independent situations, indicate for the current taxable year the amounts deductible for A.G.I., from A.G.I., or not deductible at all. Unless otherwise stated, assume all taxpayers use the cash basis method of accounting and report using the calendar year. a. M spent $1,000 on a life insurance policy covering her own life. b. G is an author of novels. His wife attempted to have him declared insane and have him committed. Fearing the effect that his wife’s charges might have on him and his book sales, G paid $11,000 in legal fees, resulting in a successful defense. c. Taxpayer, a plumber employed by XYZ Corporation, paid union dues of $100. d. Q Corporation paid T, its president and majority shareholder, a salary of $100,000. Employees in comparable positions earn salaries of $70,000. e. L operates a furniture business as a sole proprietorship. She rents a warehouse (on a month-to-month basis) used for storing items sold in her store. In late December, L paid $2,000 for rental of the warehouse for the month of January. f. M is a self-employed security officer. He paid $100 for uniforms and $25 for having them cleaned. g. N is a security officer employed by the owner of a large apartment complex. He pays $150 for uniforms. In addition, he paid $15 for having them cleaned. His employer reimbursed him $60 of the cost of the uniforms (included in his income on Form W-2). h. K owns a duplex as an investment. During the year, she paid $75 for advertisements seeking tenants. She was unable to rent the duplex, and thus no income was earned this year. i. P paid $200 for subscriptions to technical journals to be used in his employment activities. Although P was fully reimbursed by his employer, his employer did not report the reimbursement in P’s income.
7-57 Classification and Deductibility. In each of the following independent situations, indicate for the current taxable year the amounts deductible for A.G.I., from A.G.I., or not deductible at all. Unless otherwise stated, assume all taxpayers use the cash basis method of accounting and report using the calendar year. a. O paid the interest and taxes of $1,000 on his ex-wife’s home mortgage. The divorce agreement provided that he could claim deductions for the payments. b. P paid an attorney $1,500 in legal fees related to her divorce. Of these fees, $600 is for advice concerning the tax consequences of transferring some of P’s stock to her husband as part of the property settlement. c. R paid $10,000 for a small warehouse on an acre of land. He used the building for several months before tearing it down and erecting a hamburger stand. d. H and his wife moved into the city and no longer needed their personal automobiles. They sold their Chevrolet for a $1,000 loss and their Buick for a $400 gain. e. C is employed as a legal secretary. This year he paid an employment agency $300 for finding him a new, higher-paying job as a legal secretary. f. X operates his own truck service. He paid $80 in fines for driving trucks that were overweight according to state law. g. T, an employee, paid $175 to an accountant for preparing her personal income tax returns.