Rebecca is a doctor with an AGI of $125,000 before consideration of income or loss from her dog breeding business. Her home is on 15 acres, 10 of which she uses to house the animals and provide them with ample space to play and exercise. Her records show the following related income and expenses for the current year: Income from fees and sales $2,500 Expenses: Dog food $4,000 Veterinary bills 3,500 Supplies 1,200 Publications and dues 350 Must Rebecca treat the income and expenses of the operation if the dog breeding business is held to be a hobby? How would your answer differ if the operation were held to be a business?

Answer and Explanation:

1. When a tax payer engages in dog breeding activity for personal enjoyment also known as hobby rather than to make profit then the income in the form of fees and sales of $2,500 from dog breeding activity would be reported as "other income" on page one of Form 1040. The related expenses of $9,050 are not deductible as personal expenses as summarized below.

Particulars Amount Amount

Income from fees and sales $2,500

Expenses:

Dog food $4,000

Veterinary bills $3,500

Supplies $1,200

Publications and dues $350

Total deductible expenses $0

Taxable income from hobby $2,500

2. When the taxpayer is able to prove that the dog-breeding activity is a business then the related revenues and expenses of $2,500 and $9,050 respectively would be reported on Schedule C and is allowed to deduct the net loss from the dog breeding business of $6,550 ($2,500 - $9,050) while calculating adjusted gross income (AGI).