Overview
There are 2 problems that require 2 separate solutions. Please use APA 6th edition writing with at least 3 academic references to include the following:
South-Western Federal Taxation 2021: Essentials of Taxation: Individuals and Business Entities (with Intuit ProConnect Tax Online & RIA CheckPoint® 1 term Printed Access Card) , 24th Edition (This will need to be updated) • Bible - New Revised Standard Version (NRSV), Revised Standard Version (RSV), New King James Version (NKJV), American Standard Version (ASV), New American Standard Bible (NASB), or other literal English translation
Karl and Stella Meads purchased two beach houses (A and B) at Corolla, North Carolina, in early 2021. Although they intended to use the beach houses occasionally for recreational purposes, to help pay the mortgage payments, property taxes, and maintenance costs, they also planned to rent them through the realty agency Twiddy that had handled the purchase. Karl is a firefighter, and Stella is a high school guidance counselor.
The beach houses were in need of substantial repairs. Rather than hiring a contractor, Karl and Stella decided they would make the repairs themselves. During both high school and college, Karl had worked summers in construction. In addition, he had taken an advanced course in woodworking and related subjects from a local community college several years ago.
During 2021, beach house A did not need that much renovation but because of covid rentals were not that great. The Meads obtained only two short term rentals for a total of 12 days for beach house A. Also, according to a log maintained by the Meads, beach house B faired a little better. They occupied the beach house B for 74 days and rented it 79 days. The log also indicated that on 60 of the 74 days they occupied the beach house, one or both of them were engaged in work on the beach house. Their two teenage children were with them on all of these days but did not help with the work being done. On their 2021 income tax return, Karl and Stella, who filed a joint return, treated the beach house as a rental property and deducted a pro rata share of the property taxes, mortgage interest, utilities, maintenance and repairs, and depreciation in determining their net loss from the beach home. In the current year, after examining their return, an IRS agent has limited the deductions to the rent income. He contends that the 14-day personal use provision was exceeded on beach house B and that many of the alleged repairs were capital expenditures.
1. What is the tax treatment for beach house A and B. Advise the Meads on how they should respond to the IRS.
Sarah viewed herself as a creative individual who had chosen to go to pharmacy school for economic reasons. Mona’s undergraduate majors were biology and American Indian studies.
Sarah was very successful as a pharmacist for Walgreens. While in high school and college, Sarah worked on an equestrian farm. Sarah continued her interest in equestrian and began a horse training business while in pharmacy school. She continued her horse training business even while working as a pharmacists at Walgreens. She belonged to local and national horse training organizations. She took several courses in working exclusively with horses, such as animal nutrition, horse breeding and horse training and read extensively in the area. She even took several months off in the summer from her job at Walgreens to help train horses for the busy summer racing schedule. Her college enrollment in the college program provided her with hands-on experience and taught her about the technical aspects of horse training and allowed her to meet individuals who would later help her get work on the horse racing circuit.
Over the summer while working on the horse racing circuit, she received some awards for her professionalism in working with horses. At the same time, she developed a business plan, hired a bookkeeper to manage the finances, and hired an accounting firm to provide tax advice.
During this three-year period, she reported the following losses:
2019- $150,000 2020-$300,000 2021-$250,000
On her tax returns for the three-year period, in each year, she offset these amounts against her pharmacy income of approximately $250,000 per year.
Upon audit by the IRS, the agent concluded that her horse training activity is a hobby and therefore the losses cannot be deducted except to the extent of the income generated.
Who is correct? Explain with authoritative tax law.