ExpertMedium1 markMultiple Choice
CPA · Question 08 · Area 1: Individual Tax
A taxpayer has a $50,000 loss from a 'hobby' activity in Year 1. The activity generated $20,000 of gross income. The taxpayer has $10,000 of expenses that would be deductible regardless of the activity (e.g., property taxes) and $40,000 of other operating expenses. Under the current tax law (TCJA), what is the net effect on the taxpayer's taxable income?
A taxpayer has a $50,000 loss from a 'hobby' activity in Year 1. The activity generated $20,000 of gross income. The taxpayer has $10,000 of expenses that would be deductible regardless of the activity (e.g., property taxes) and $40,000 of other operating expenses. Under the current tax law (TCJA), what is the net effect on the taxpayer's taxable income?
Answer options:
A.
Increase of $0
B.
Decrease of $30,000
C.
Increase of $10,000
D.
Increase of $20,000
How to approach this question
1. Hobby Income: Must be reported as 'Other Income' ($20,000).<br/>2. Hobby Expenses: Under TCJA (2018-2025), miscellaneous itemized deductions subject to 2% floor are suspended. This includes hobby operating expenses.<br/>3. Exception: Expenses deductible anyway (Mortgage interest, Property taxes) are still deductible on Schedule A.<br/>4. Net Effect: Income +$20,000. Deduction -$10,000 (Property Tax). Net +$10,000.
Full Answer
C.Increase of $10,000✓ Correct
C
The taxpayer must report the $20,000 gross income. The $40,000 operating expenses are miscellaneous itemized deductions, which are suspended under TCJA. The $10,000 property taxes are deductible on Schedule A (subject to SALT caps, assumed deductible here). Net impact: +$20,000 Income - $10,000 Deduction = +$10,000 increase in taxable income.
Common mistakes
Deducting hobby expenses up to the amount of hobby income (old rule) or forgetting that property taxes are still deductible.
Practice the full CPA TCP Practice Exam
68 questions · hints · full answers · grading
More questions from this exam
Q01An individual taxpayer, filing single, exercised 1,000 Incentive Stock Options (ISOs) in Year 1 w...HardQ02A taxpayer has the following income and losses for Year 1:<br/>- Salary: $200,000<br/>- Interest ...HardQ03In Year 1, a taxpayer donates a piece of artwork to a public charity (50% limit organization). Th...HardQ04A taxpayer has $10,000 of investment interest expense in Year 1. They have the following income i...MediumQ05A single taxpayer has the following financial profile for Year 1:<br/>- Wages: $180,000<br/>- Net...Medium