ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM | FREE SOLVED ANSWERS
Which of the following is not a relevant factor to be considered in deciding whether an activity is profit seeking or a hobby?
Which of the following is not a relevant factor to be considered in deciding whether an activity is profit seeking or a hobby?
Multiple Choice
a. All of the choices are relevant factors.
b. Manner in which the taxpayer carries on the activity.
c. Time and effort expended by the taxpayer in carrying on the activity.
d. Expertise of the taxpayer’s advisers.
Correct Answer: A. All of the choices are relevant factors.
All of the choices are relevant factors.
The question asks which of the listed options is not a relevant factor in determining if an activity is profit-seeking or a hobby. In tax law, particularly concerning the IRS, several factors are considered to differentiate between a business activity (profit-seeking) and a hobby. These factors include:
- Manner in which the taxpayer carries on the activity: This refers to whether the activity is conducted in a businesslike manner, with complete and accurate books and records, and an intent to make a profit.
- Time and effort expended by the taxpayer in carrying on the activity: Significant time and effort dedicated to the activity, especially if it indicates an attempt to make a profit, is a relevant factor.
- Expertise of the taxpayer’s advisers: Seeking advice from experts in the field, such as tax professionals or business consultants, can indicate a serious intent to make a profit.
Since all the provided options (Manner in which the taxpayer carries on the activity, Time and effort expended by the taxpayer in carrying on the activity, and Expertise of the taxpayer’s advisers) are indeed relevant factors, the statement “All of the choices are relevant factors” is the correct answer to the question asking which is not relevant, as it implies none of the individual listed factors are irrelevant.
ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM FREE SOLVED ANSWERS