Hobby Losses
Response to the following problem:
Russ is retired from his regular work and now spends his time painting landscapes in a studio set up in his home. The studio occupies 12% of the living space in his home. During the year, Russ sold some of his paintings for the first time. Russ is not certain whether he is required to file a tax return and, if so, whether he will be required to pay any taxes on his painting as a business. The revenue from sales of paintings was $2,300. Russ's expenses were as follows:
property taxes on his home, $3,600;
interest on a loan for painting supplies, $140;
painting supplies, $1,750;
electricity for the home, $2,400;
and gas heat for the home, $2,900.
a. How much can Russ deduct of the above expenses if his painting activity is treated as a business? Show your calculations.
b. Same as in Part a., except that the painting activity is treated as a hobby.
c. Explain what Russ might do in the way of tax planning to further support a claim that his painting is a business activity.