amantha, 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's 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's 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:
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Income from fees, prizes, and sales
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$22,000
|
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Expenses
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|
|
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Entry fees
|
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1,000
|
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Feed and veterinary bills
|
|
4,000
|
|
Supplies
|
|
900
|
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Publications and dues
|
|
500
|
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Travel to horse shows (no meals)
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2,300
|
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Salaries and wages of employees
|
|
8,000
|
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Depreciation
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|
|
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Horse equipment
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$3,000
|
|
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Horse farm improvements
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7,000
|
|
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On 10% of personal residence
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1,000
|
11,000
|
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Total home mortgage interest
|
|
24,000
|
|
Total property taxes on home
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2,200
|
|
Total property taxes on horse farm improvements
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|
800
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The mortgage interest is only on her home because the horse farm improvements are not mortgaged.
a. What are Samantha's tax consequences if the miniature horse activity is a hobby?
b. If it is a business?