Please read Ethics & Equity When is a Dairy Farm a Trade or Business on pg 6-17. Is the position by Randolph defensible? Review the 9 factors considered to help determine whether an operation should be considered a business or hobby. See in the same page the general rules. You should also do some outside research on the subject, include in your own words and cite your sources. Write a detailed memo to Randolph with your research findings to properly advise him on this matter. Your memo will likely be 01 page only. – (Should be less than 20%) – Due : Tuesday, February 25th 11:59pm.
6-3e Hobby Losses Business or investment expenses are deductible only if the taxpayer can show that the activity was entered into for the purpose of making a profit. Certain activities may have either profit-seeking or personal attributes, depending upon individual circumstances. Examples include raising horses and operating a farm used as a weekend residence. While personal losses are not deductible, losses attributable to profit-seeking activities may be deducted and used to offset a taxpayer’s other income. For this reason, the tax law limits the deductibility of hobby losses.
General Rules If an individual can show that an activity has been conducted with the intent to earn a profit, losses from the activity are fully deductible. The hobby loss rules apply only if the activity is not engaged in for profit. Hobby expenses are deduct- ible only to the extent of hobby income.40 The Regulations stipulate that the following nine factors should be considered in determining whether an activity is profit-seeking or is a hobby:41 • Whether the activity is conducted in a businesslike manner. • The expertise of the taxpayers or their advisers. • The time and effort expended. • The expectation that the assets of the activity will appreciate in value. • The taxpayer’s previous success in conducting similar activities. • The history of income or losses from the activity. • The relationship of profits earned to losses incurred. • The financial status of the taxpayer (e.g., if the taxpayer does not have sub- stantial amounts of other income, this may indicate that the activity is engaged in for profit). • Elements of personal pleasure or recreation in the activity. The presence or absence of a factor is not by itself determinative of whether the activity is profit-seeking or is a hobby. Rather, the decision is a subjective one that is based on an analysis of the facts and circumstances.
ETHICS & EQUITY When Is a Dairy Farm a Trade or Business?
Randolph has been an orthopedic surgeon in New Orleans for 15 years. He would like to devote less time to his medical practice, spend more time with his family, and pay less income tax. His net income from his medical practice has been about $500,000 per year for the past five years. Randolph grew up on a dairy farm in southeastern Louisiana. He has many fond memories of his childhood and believes a farm would be an excellent environment for his three children. Randolph purchases a dairy farm across Lake Pontchartrain from New Orleans. He hires two full-time employees to handle the milking operations and other part-time employees as needed. In addition, Randolph and his family participate in performing various activities on the farm.
Randolph commutes to New Orleans four days a week to continue his medical practice. Because he is devoting less time to the practice, his net income decreases to $400,000. Randolph has a loss of $75,000 for the dairy farm that he attributes to depressed milk prices and his inexperience at running the farm. He considers the medical practice and the dairy farm to be separate trades or businesses. Therefore, on the Federal income tax return, the $75,000 net loss is offset against the $400,000 net income. Assume that the net income and net loss from the medical practice and the dairy farm, respectively, remainapproximatelythesameforthenextfouryears. Is the position adopted by Randolph defensible? Discuss.
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