Marie makes baked goodsHomework Answers
Answer: Marie should report this income as Hobby Income on Schedule 1 (Form 1040), line 21. She can also include her expenses on Schedule A (Form 1040)
Explanation: In the given case Marie makes baked goods and jams and sells them at craft fairs and farmer's markets in her local area. The primary question in this case is whether the activity undertaken by Marie can be termed as business or not.
As per IRS an activity is a business if out of last 5 tax years, it has made profit in at least 3 years. If there isn't profit in at least 3 years, IRS looks into following conditions to determine if it is business or not:
- The manner in which the activity is carried out
- The time and effort put into the activity
- Whether the individual depend on income from the activity for livelihood
- Whether the losses are due to circumstances beyond your control
- Has the individual changed the methods of operation in an attempt to improve profitability
- Knowledge needed to carry on the activity as a successful business
- Whether profit was made from similar activities in the past
- The amount of occasional profits, if any
- Whether there will be future profit from the appreciation of the assets
From the facts given in the question and above mentioned conditions, it seems Marie is engaged in activity of baking just as a hobby.
IRS allows certain deductions of certain expenses incurred to earn the hobby income.
Accordingly the fourth option is right.
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