Question: Dory, age 40, is unmarried. She rents an apartment in the city that she shares with two dependent children, ages 10 and 8. Dory makes pottery in her spare time. She typically rents a booth at six to eight arts and crafts shows each year where she sells her pottery. Her income and expenses for the current year from this activity are as follows:
Revenue from pottery sales $ 25,000
Expenses:
Cost of goods sold 11,000
Supplies 6,000
Show registration and booth rental fees 5,000
Advertising and other costs 4,000
Depreciation of business property 3,000
Dory's adjusted gross income (AGI), without considering the effect of the sale of the pottery, is $65,000. Dory has no other items that would affect her AGI. Itemized deductions not related to this activity (i.e., state & local income taxes, interest, charitable contributions, etc.) total $9,000.
Required: Showing your calculations using good form, compute both the taxable net income (loss) from the activity and Dory's taxable income for 2016, if the pottery activity is classified as:
a. A hobby.
b. A business.