Question

penny, a full-time biochemist, loves stock car racing. to feed her passion, she bought a used dirt-track car and has started entering some local dirt-track races. the prize money is pretty small ($1,000 for the winner), but she really is not in it for the money. penny reported the following income and expenses from her nights at the track: prize money $ 3,300 expenses: transportation from her home to the races 1,750 depreciation on the dirt-track car 5,840 entry fees 3,300 oil, gas, supplies, repairs for the dirt-track car 2,400 what are the tax effects of penny's racing income and expenses assuming that the racing activity is a hobby for penny?

Answer 1

If the racing activity is considered a hobby for Penny, she must report her racing income and expenses on her tax return, but she will not be able to deduct her expenses beyond the amount of her racing income.

In this case, Penny reported $3,300 in racing income and $15,290 in racing expenses. Since her expenses exceed her income, she will not have to pay taxes on her racing income. However, she will only be able to deduct $3,300 of her racing expenses on her tax return.

The $1,750 transportation expense is not deductible because it is considered a personal expense. The $5,840 depreciation expense is not deductible because depreciation is only allowed for business or investment property, not personal property. The $3,300 entry fees and $2,400 for oil, gas, supplies, and repairs for the dirt-track car are deductible as hobby expenses, but only up to the amount of the racing income.

In summary, Penny can report her racing income and expenses on her tax return as a hobby, but she will only be able to deduct $3,300 of her expenses.