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: Prize money $2,500 Expenses: Transportation from her home to the races 1,000 Depreciation on the dirt-track car 4,000 Entry fees 3,500 Oil, gas, supplies, repairs for the dirt-track car 2,050 What are the tax effects of Penny's racing income and expenses assuming that the racing activity is a hobby for Penny?

Question

Bird

Business

2 August, 13:06

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: Prize money $2,500 Expenses: Transportation from her home to the races 1,000 Depreciation on the dirt-track car 4,000 Entry fees 3,500 Oil, gas, supplies, repairs for the dirt-track car 2,050 What are the tax effects of Penny's racing income and expenses assuming that the racing activity is a hobby for Penny?

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Answers (1)

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Brogan Christensen · Answer 1

Deductible expenses: 500 (hobby expense after revenue limit - 2% AGI floor).

Explanation:

AGI Before activity: $97,500

Hobby Rev. : $2,500

AGI after activity: 100,000

Hobby expense: 10,550

Hobby expense after revenue limit: 2,500 (lessor of hobby rev. and hobby expense)

2% AGI Floor: 2,000

Deductible expenses: 500 (hobby expense after revenue limit - 2% AGI floor)

$500 is the answer.