Question

Hank is single and a doctor in a west Texas community. He owns and operates a cattle ranch, which has been profitable in only one of the last 10 years. He believes that he satisfies one-third of the nine factors that the IRS uses to determine whether an activity is profit-seeking or is a hobby. Without regard to this activity, Hank’s AGI is $225,000. His only other itemized deductions are $4,000 of property taxes on his residence and $3,500 of charitable contributions. The ranch produces the following revenues and expenses in 2014:
Revenues .................. $31,000
Mortgage interest on barn ............. 9,000
Property taxes on barn and land ......... 7,500
Cattle feed .................. 14,000
Hay .................... 4,725
Maintenance on barn .............. 3,000
Depreciation on barn .............. 2,950
a. Is Hank’s cattle ranch profit-seeking, or is it a hobby? Explain the probabilities.
b. Determine Hank’s taxable income if the ranch is a hobby.
c. Determine his taxable income if the ranch is a business.


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  • CreatedMay 25, 2015
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