Question

Priscilla pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby
is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:
Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500
Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
a. Include $10,000 in income and deduct $11,000 for AGI.
b. Ignore both income and expenses since hobby losses are disallowed.
c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized
deductions,

d.include $10,000 in income and deduct nothing.
e. None of the above.

Answer 1

Answer:

e) None of the above

Explanation:

1. $10,000 , proceeds from sale of bedspreads, shall be included in Income.

2. Itemised deductions are as follows:

Titles	Amount
Supplies	$4,000
Interest on loan	$500
Advertising	$6,500
Total Potential Deductions	$11,000
Less: 2% of $50,000	($1,000)
Itemized Deductions	$10,000

Potential deduction must be decreased y 2% of $50,000 i.e. must be decreases by $1,000. so we get $10,000 as itemised deductions ($11,000-$1,000)

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