AUDIT TEST 2 QUESTIONS WITH 100%
CORRECT ANSWERS [GRADED A+]
Personal losses - ✔✔Not deductible
Revenue from hobby - ✔✔Other income
Hobby loss deductions - ✔✔Itemized deductions (from AGI deductions)
Hobby expenses deductible - ✔✔Only to the extent of hobby income
*only to extent of gross income from the hobby
Presumptive rule: - ✔✔An activity is profit-seeking if the activity shows a
profit in at least 3 of the previous 5 tax years
If activity involves horses, a profit in 2 of the last 7 years meets
presumptive rules
©morren2025/2026.Year published 2026.
, If profitability tests are met, activity assumed to be trade or business rather
than a personal hobby
If activity is hobby, expenses deducted in the following order: - ✔✔1.
Property taxes and home mortgage interest
2. Maintenance, utilities, and supplies
3. Amounts for depreciation, amortization, and depletion
Last two categories of deductions deductible from AGI as itemized
deductions to the extent they exceed 2% of AGI
1. Exchanges of property between related parties: Losses
2. When property is subsequently sold to a nonrelated party, -
✔✔Disallowed
Right of offset created equal to the disallowed loss
2. Any gain recognized is reduce by the right of offset
©morren2025/2026.Year published 2026.
CORRECT ANSWERS [GRADED A+]
Personal losses - ✔✔Not deductible
Revenue from hobby - ✔✔Other income
Hobby loss deductions - ✔✔Itemized deductions (from AGI deductions)
Hobby expenses deductible - ✔✔Only to the extent of hobby income
*only to extent of gross income from the hobby
Presumptive rule: - ✔✔An activity is profit-seeking if the activity shows a
profit in at least 3 of the previous 5 tax years
If activity involves horses, a profit in 2 of the last 7 years meets
presumptive rules
©morren2025/2026.Year published 2026.
, If profitability tests are met, activity assumed to be trade or business rather
than a personal hobby
If activity is hobby, expenses deducted in the following order: - ✔✔1.
Property taxes and home mortgage interest
2. Maintenance, utilities, and supplies
3. Amounts for depreciation, amortization, and depletion
Last two categories of deductions deductible from AGI as itemized
deductions to the extent they exceed 2% of AGI
1. Exchanges of property between related parties: Losses
2. When property is subsequently sold to a nonrelated party, -
✔✔Disallowed
Right of offset created equal to the disallowed loss
2. Any gain recognized is reduce by the right of offset
©morren2025/2026.Year published 2026.
