Lew is a practicing CPA who decides to raise bonsai as a business. Lew engages in the activity and has the following revenue and expenses: Sales $ 5,000 Depreciation on greenhouse 10,000 Fertilizer, soil, pots 1,500 If an amount is zero, enter "0". a. Select either "Yes" or "No" to indicate which of the following are factors the IRS will consider when evaluating whether the activity is a business or a hobby. 1. Carrying on the activity in a businesslike manner. Yes 2. The time and effort put into the activity indicate you intend to make it profitable. Yes 3. Dependence on the income for the taxpayer's livelihood. Yes 4. Whether the losses are due to circumstances beyond control (or are normal in the startup phase of this type of business). Yes 5. Attempts to change methods of operation to improve profitability. Yes 6. The taxpayer or advisors have the knowledge needed to carry on the activity as a successful business. Yes 7. Success in making a profit in similar activities in the past. Yes 8. The activity makes a profit in some years. Yes 9. The activity is expected to make a future profit from the appreciation of the assets used in the activity. Yes Feedback b. If the activity is deemed to be a regular business, what is the amount of Lew's loss from the activity? $ c. If the activity is deemed to be a hobby, what is the amount of Lew's expenses (if any) from the activity that may be deducted? $

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Problem 3-25
Hobby Losses (LO 3.12)

Lew is a practicing CPA who decides to raise bonsai as a business. Lew engages in the activity and has the following revenue and expenses:

Sales	$ 5,000
Depreciation on greenhouse	10,000
Fertilizer, soil, pots	1,500

If an amount is zero, enter "0".

a. Select either "Yes" or "No" to indicate which of the following are factors the IRS will consider when evaluating whether the activity is a business or a hobby.

1.	Carrying on the activity in a businesslike manner.	Yes
2.	The time and effort put into the activity indicate you intend to make it profitable.	Yes
3.	Dependence on the income for the taxpayer's livelihood.	Yes
4.	Whether the losses are due to circumstances beyond control (or are normal in the startup phase of this type of business).	Yes
5.	Attempts to change methods of operation to improve profitability.	Yes
6.	The taxpayer or advisors have the knowledge needed to carry on the activity as a successful business.	Yes
7.	Success in making a profit in similar activities in the past.	Yes
8.	The activity makes a profit in some years.	Yes
9.	The activity is expected to make a future profit from the appreciation of the assets used in the activity.	Yes

Feedback

b. If the activity is deemed to be a regular business, what is the amount of Lew's loss from the activity?
$

c. If the activity is deemed to be a hobby, what is the amount of Lew's expenses (if any) from the activity that may be deducted?
$

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