Penny, a full-time biochemist, loves stock car racing. To feed her passion, she

Question

Penny, a full-time biochemist, loves stock car racing. To feed her passion, she bought a used dirt-track car and has started entering some local dirt-track races. The prize money is pretty small ($1,000 for the winner), but she really is not in it for the money. Penny reported the following income and expenses from her nights at the track:

Calculate Penny’s deduction for the racing expenses assuming that the racing activity is a hobby and that Penny’s AGI is $96,000 before considering the prize money.

Prize money $ 3,200 Expenses: Transportation from her home to the races 2,150 Depreciation on the dirt-track car 4,220 Entry fees 5,600 Oil, gas, supplies, repairs for the dirt-track car 2,830

Explanation / Answer

Hobby revenues are included in the goss income Hobby expenses are deductible only as miscellaneous itemized deductions,ie. subject to the 2% of AGI floor Penny's maximum deduction for racing expenses(Hobby): Actual expenses incurred(2150+4220+5600+2830)= 14800 But, Expenses deductible up to a maximum of the hobby revenue 3200 Over & above the 2%*(96000+3200)---Miscellaneous itemized deduction--- -1984 So, Maximum deduction allowed 1216

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