Chapter 6 Homework Solutions

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Hobby v. Trade or Business 24. If Jacob Blue's stamp collecting activities constitute a hobby, the following expenditures are deductible for tax purposes: Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$20,000 Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 Gross income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$12,000 Travel expenses (limited to remaining income). . .. . . . . . . . . . . . . . . . . 11,000 Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Hobby Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 0 If Jacob Blue's stamp collecting activities constitute a trade or business, the full travel expenses of \$11,000 and the full miscellaneous expenses of \$4,000 are deductible, and Jacob has a \$3,000 business loss for tax purposes. The \$14,000 of stamp purchases is not deductible for tax purposes until the stamps are sold. If Jacob Blue's stamp collecting activities constitute a hobby, hobby expenses are deductible (up to the amount of gross profit) as miscellaneous itemized deductions subject to the 2 percent of AGI limitation.   Losses Deductions 29. Loss on sale of stock by individual's business (\$4,000). Deductible. Loss was incurred in a trade or business. Stock loss deductible for AGI. Hobby loss in excess of hobby gross income (\$3,000). Not deductible. Hobby losses are personal losses and deductible only to extent of hobby gross income. Gambling losses in excess of gambling winnings (\$8,000). Not deductible. Gambling losses are deductible only to extent of gambling winnings. Loss on sale of stock in individual's investment portfolio (\$9,000). Deductible. Loss was incurred in a transaction entered into for profit. Stock losses are deductible for AGI subject to capital loss limitations. Decline in value of stock held in individual's investment portfolio (\$7,000). Not deductible. Unrealized losses are not normally deductible for tax purposes. Loss on sale of personal automobile (\$2,000) is not deductible. Personal losses are not deductible for tax purposes.

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Trade or Business Deductions 30. The following expenditures of Ajax Corporation are deductible on its 2008 tax return: Salaries and wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$400,000 Entertainment expenses (50 percent limitation) . . . . . . . . . . . . . . . . . . . . . . . . .
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