Stewie, a single taxpayer, operates an activity as a hobby. Brian, a different t

Question

Stewie, a single taxpayer, operates an activity as a hobby. Brian, a different taxpayer, operates a similar activity as a bona fide business. Stewie’s gross income from his activity is $5,000 and his expenses are $6,000. Brian’s gross income and expenses are coincidentally the same as Stewie. Neither Stewie nor Brian itemize but both have other forms of taxable income. What is the impact on taxable income for Stewie and Brian from these activities?

a. Stewie will report $0 income and Brian will report a $1,000 loss.

b. Stewie will report $5,000 income and $5,000 as a miscellaneous itemized deduction and Brian will report a $1,000 loss.

c. Stewie and Brian will report $0 taxable income.

d. Stewie and Brian will report a $1,000 loss.

e. Stewie will report a $1,000 loss and Brian will report $5,000 income.

Please show all calculations and explain why you chose your answer. Thank you.

Explanation / Answer

Ans is b. Stewie will report $5,000 income and $5,000 as a miscellaneous itemized deduction and Brian will report a $1,000 loss.

Explanation: As per hobby loss limitation, expenses from hobby is subject to income from activity and also that expenses can only be deducted as miscellaneous itemized deduction subject to 2% limitation. On the other hand if it’s a business there is no limitation for expenses deduction.

So for Stewie Gross income is 5000 so expenses is limited to 5000 only not 6000

For Brian gross income 5000 and expenses 6000 = Loss of $1000

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