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2 October, 19:08

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.

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  1. 2 October, 21:03
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    The solution to the given problem is done below.

    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
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