Question 1

If a taxpayer can deduct expenses to the extent of gross income for a hobby, is there really no taxable income? And what would be the benefit, to the taxpayer, of having it considered a for profit activity by the IRS?

Upon inquiry by the IRS, a taxpayer was unable to show that his activity had a profit in three of the past five years. Therefore, the IRS deemed the activity to be a hobby. The taxpayer believes the activity to be profit motivated. How would the taxpayer prove that the activity is profit motivated? Discuss ideas that might convince the IRS that the activity is profit motivated. What other options does the taxpayer have?

Question 2

Inventory valuation is seen by many companies as an important factor in their success. What do you feel are types of decisions a company must make when choosing an inventory valuation method? What is the relationship of this decision to the cost of goods sold for the company? Explain your reasoning.

Question 3

Discuss some of the pros and cons of using debt as a long-term source of capital funding for a company. Why does using an appropriate amount of debt increase the value of the firm?