2. This question is worth 20 points Matt is single, age 25 and has salary from h

Question

2. This question is worth 20 points Matt is single, age 25 and has salary from his job as a sports announcer in the amount Matt also has the following income and expenses related to an activity Income Mortgage interest - from his home office Property taxes from his home office Depreciation Supplies and fees Telcphone $23,000 8,000 2,000 5,000 8,000 2,000 2.List 4 factors 3. If a hobby, answer the following questions might be used to assist a taxpayer in determining whether an activity is a hobby or a business? a. Are hobby expenses deductions FOR AGI or FROM AGI? b. What form/schedule and line is hobby income reported on? Attac h a copy of the form/schedule to your answer and highlight the line. c. What form/schedule and line are hobby expenses reported on? Attach a copy of the form/schedule to your answer and highlight the line. d. Calculate Matt's AGI c. What is the rale regarding how hobby expenscs are deducted, including the ordering of expenses and all limitations? expenses are calculated AND provide a (follow the formula that we used in the hw problems). 4. If a business, answer the following questions: f. Apply the rule in (e) above and prepare a detailed schedule of your calculation of deductible hobby a. Are business expense deductions FOR AGI or FROM AGI? b. What form/schedule is business income reported on? c. What form/schedule are business expenses reported on? d. Prepare a tax return for Matt, assuming he uses the standard deduction and has no dependents This question is worth 15 points. During the year, Evan rented his vacation home for 90 days and spent 60 days there. Gross rental income from the property was $5,000. Evan incurred the following expenses: mortgage interest, $2,000; real estate taxes, $2,500; utilities, $1,000; maintenance, $300; and depreciation, $5,000 3. 1. Identify how this vacation home is treated and how you came to your conclusion (state the rule and apply th facts to the rule). 2. Compute Evan's allowable deductions for the vacation home using the IRS's approach. 3. What schedule does Evan report rental income and expenses on? 4. Prepare the schedule using the figures above and attach it to your answer 5. Which personal expenses are deductible? Your answer should include: how thesc expenses classified (for AGI, from AGI - what form/schedule) and the amount of the deduction.

Explanation / Answer

QUESTION 2

1. As per the IRS, an activity performed by a person becomes his hobby when he does not perform such activity for the purpose of making the profit i.e he is not trying to earn money from that activity. If an activity is considered as a hobby then the expenses related to such activity are deductible only till the amount of income earned from the hobby activity. Moreover, any losses from hobby activity may not be used to offset other income. However, on the other side if such activity is performed with sole intention of earning money then such activity falls under the category of Business as per the IRS.

2. Four factors for guiding whether any activity is hobby or business are as follows:

a. Does the time and effort put into the activity indicate an intention to make a profit?

b. Does the taxpayer depend on income from the activity?

c. Does the activity make a profit in some years?

d. Has the taxpayer changed methods of operation to improve profitability?

3. a. If the IRS declares it’s a hobby, you can’t deduct business losses and expenses on your tax return. You can only deduct your hobby expenses up to the amount of income you earn. Therefore, expenses are not wholly deductible from AGI but deductible only till the amount of income earned from hobby.

b. Hobby income is reported on Form 1040, Line 21.

c. Deductions for hobby expenses are claimed as itemized deductions on Schedule A (Form 1040).

e. Rule regarding hobby expenses- Hobby expenses are taken in the below mentioned order only:

1. Home mortgage interest and taxes for personal as well as business activities may be taken in full.

2. Advertising, insurance premiums and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category. These are those deductions that don’t result in an adjustment to basis.

3. Business deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

QUESTION 3

SECTION QUOTE: As per the topic no 415 of IRS, Renting Residential and Vacation Property, if a person rent out his house which is used for his personal purpose for some part of days then such rental income of the person shall be taxable income of the person as proportionely reduced by mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation.

A dwelling unit is considered as residence if person use it for personal purposes during the tax year for more than the greater of:

In the given case person has used property for residence purpose for more than 14 days and is therefore to be considered property used for residential purpose. Expenses incurred on the property will also be proportinately divided between residential and rented on the basis of number of days. Moreover, you can deduct expenses on rental only upto the amount of rental income.

Expenses deductible as Rented property = (2,000 + 2,500 + 1,000 + 300 + 5,000) / 150 x 90 days = $6,480

Rent Received = $5,000

Expenses deductible from rental income = $6,480 or $5,000 whichever is lower = $5,000

1. As stated above, vacation home will be considered as "use as a home" property since it was used for more than 14 days in the year. Related rules and topics:

2. Evan's allowable deduction for vacation home is $5,000 as computed above.

3. Rental income and expenses are required to be reported on Schedule E, Supplemental Income and Loss.

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