Answer:
The solution to the given problem is done below.
Explanation:
Alex must report the $18,000 as revenues. All of the property taxes of $3,000 can be deducted. Because the remaining expenses of $16,250 exceed the balance of $15,000 ($18,000 revenues − $3,000 property taxes), the $15,000 is deductible as follows:
Materials and supplies $ 4,500
Utilities 2,000
Advertising 5,000
Insurance 750
Depreciation (because depreciation is sequenced
last, only $2,750 of the $4,000 is eligible) 2,750
Total deductible expenses $15,000
These expenses of $15,000 are classified as miscellaneous itemized deductions and will be subject to the 2%-of-AGI floor. Hence, $1,200 [($42,000 + $18,000) × 2%] of these expenses is disallowed.
Other AGI $42,000
Revenues from hobby $18,000
Less: Expenses
Property taxes (3,000)
Miscellaneous itemized
deduction ($15,000 − $1,200) (13,800)
Less: Personal exemption (4,050)
Taxable income $39,150
