Samantha, an executive, has AGI of $100,000 before considering income or loss from her miniature horse business. Her outside income comes from prizes for winning horse shows, stud fees, and sales of yearlings. Samantha%u2019s home is on 20 acres, half of which she uses for the horse activity (i.e., stables, paddocks, fences, tack houses, and other related improvements). Samantha%u2019s office in her home is 10% of the square footage of the house. She uses the office exclusively for maintaining files and records on the horse activities. Her books show the following income and expenses for the current year:
Income from fees, prizes, and sales $22,000 Expenses Entry fees 1,000 Feed and veterinary bills 4,000 Supplies 900 Publications and dues 500 Travel to horse shows (no meals) 2,300 Salaries and wages of employees 8,000 Depreciation %u2014 Horse equipment $3,000 Horse farm improvements 7,000 On 10% of personal residence 1,000 11,000 Total home mortgage interest 24,000 Total property taxes on home 2,200 Total property taxes on horse farm improvements 800
The mortgage interest is only on her home because the horse farm improvements are not mortgaged. a. What are Samantha%u2019s tax consequences if the miniature horse activity is a hobby? b. If it is a business?