Discussion Board Forum 1

Discussion Board Forum

Name

Institution Affiliate

Course

Date
Discussion Board Forum 2

Case Summary

Wes has been an Orthopedic surgeon for the last fifteen years; he has decided to venture

into farming, enabling him to spend more time with family and pay less income taxes. The

current performance of the dairy farm, which is located in Georgia, his home village, is not doing

well since in the last financial year, the farm recorded $75,000 in losses. His career has also been

affected due to less time she is spending less time in medical practice. She wants to know

whether his actions are justifiable in the next four years if the situation remains the same.

Solution

For many years, Wes has spent most of his time in the medical field, and she receives

most of the income from her practice, although spending four days of his week working on it.

When Wes opened a new dairy farm in Georgia, he was not expecting to earn a higher income

than what he was earning in Atlanta. The primary purpose was to pay less income tax and spend

most of the time with family. Wes is in a dilemma on whether to continue the farm that is not

profitable and go back to Atlanta to continue his surgeon practice. If he chooses to continue with

the farm, will it be classified as a hobby or profitable business by the Internal Revenue Authority

(IRS).

The business classification by IRS for owes is very critical since paying less tax was the

other main reason he established the dairy farm. According to IRS rules, any business engaged in

earning profit should be treated as a normal business. The losses are deductible against other

forms of income, in this case, the practice income. On the other hand, a business or farm is

classified as a hobby if it is maintained without the expectation of being the primary source of

income.
Discussion Board Forum 3

In addition to profit, a hobby business must fulfil the following condition outlined by the

IRS question and answer section.

❖ Whether you carry on the activity in a businesslike manner and maintain

complete and accurate books and records.

❖ Whether you have personal motives in carrying on the activity.

❖ Whether the time and effort you put into the activity indicate, you intend

to make it profitable.

❖ Whether you depend on income from the activity for your livelihood.

❖ Whether your losses are due to circumstances beyond your control (or are

normal in the startup phase of your type of business).

❖ Whether you or your advisors have the knowledge needed to carry on the

activity as a successful business.

❖ Whether you were successful in making a profit in similar activities in the

past.

❖ Whether the activity makes a profit in some years and how much profit it

makes.

❖ Whether you can expect to make a future profit from the appreciation of

the assets used in the activity. ("IRS Income & expenses," 2021)

Considering all the factors listed above, Wes dairy farming business can only be

classified as a hobby since it is not the primary source of income for his family. The business is

likely to make a loss in the next four years, which is in line with IRS condition that a business is

Considered a business if it makes a profit in at least 3 of the 5 years, which is not the case with

Wes business.
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If Wes did not open the Dairy farm business to make a profit, he should continue

investing in it, enabling him to spend more time with family. According to the Tax Cut and Job

Act 2017 initiated by former President Donald J. Trump, Wes losses are disallowed for

deduction since his business is classified as a hobby (Rinier & Curatola, 2018). According to the

Act, hobby expenses that fail three-tier deduction systems are not deductible. Therefore, Wes can

only use the farm to spend time with his family and not to reduce his income taxes.
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References

Rinier, J. W., & Curatola, A. P. (2018). HOBBY GROSS INCOME AND EXPENSES AFTER THE TCJA:

The Tax Cuts and Jobs Act of 2017 may have made the reporting of hobby gross income and

expenses even more challenging for taxpayers and their tax preparers. Strategic Finance, 100(1),

15-17.

IRS Income & expenses. (2021, January 19). Internal Revenue Service | An official website of

the United States government. https://www.irs.gov/faqs/small-business-self-employed-

other-business/income-expenses/income-expenses