| Course | ACC 330 Federal Taxation I |
|---|---|
| Module | Module 4 |
| Paper type | undergraduate tax research memo on the activity not engaged in for profit rules |
| Length | About 900 words, 5 pages |
| Format | APA 7 student paper |
| School | Southern New Hampshire University |
| Program | BS Accounting |
| Updated | October 2026 |
Free sample paper for ACC 330 Module 4
Memorandum
To: Elena, client file
From: [Student Name], Tax Associate
Date: [Date]
Re: Whether the pottery activity is engaged in for profit under section 183, tax year 2024
Facts
Elena, a freelance bookkeeper who files jointly with her husband, began making pottery in 2019 after two semesters of ceramics courses at a community college. In 2021 she bought a used kiln, set up a studio in the garage and began selling mugs, bowls and planters at Saturday farmers' markets and through an online craft shop. She spends about eight hours a week on pottery, more before the holidays. She has no separate bank account, no written business plan and no records beyond receipts kept in a folder. She describes pottery as the thing that keeps her sane during tax season. Results have been as follows: 2021, loss of $2,900; 2022, loss of $2,100; 2023, loss of $1,500; 2024, loss of $1,700, on sales of $3,900 and expenses of $5,600. In 2024 she raised prices by about 20 percent and placed pieces with one gift shop on consignment. Her household's other income is about $110,000.
Issue
Is Elena's pottery activity engaged in for profit within the meaning of section 183 for tax year 2024, so that its expenses are deductible against its income and her other income, or is it an activity not engaged in for profit, so that its income is taxable and its expenses are not deductible?
Authorities
Section 183 limits deductions for activities not engaged in for profit. The regulations under that section list nine factors used to judge profit motive: the manner in which the activity is carried on, the expertise of the taxpayer, the time and effort expended, the expectation that assets will appreciate, success in similar activities, the history of income or losses, the amount of occasional profits, the taxpayer's financial status and elements of personal pleasure. No single factor controls. Section 183(d) presumes a profit motive if the activity is profitable in three of five consecutive years. Since 2018, the deductions that hobby expenses would otherwise produce are suspended, while hobby income remains fully taxable (Internal Revenue Service, 2024).
Two court decisions frame how the factors are applied. The Tax Court has held that what counts is a genuine, good-faith aim to earn money from the activity, even an aim that turns out to be unrealistic (Dreicer v. Commissioner, 1982). The Seventh Circuit, reviewing a couple who restored a dairy farm part time, reversed a finding against them and held that losses during a start-up period do not by themselves show a lack of profit motive when the taxpayers act in a businesslike way toward an eventual profit (Nickerson v. Commissioner, 1983).
Analysis
Table 1. The Nine Factors Applied
| Factor | Facts | Points toward |
|---|---|---|
| Manner of carrying on | No separate account, no plan, receipts in a folder | Hobby |
| Expertise | Two semesters of ceramics courses; no business training in pottery | Neutral |
| Time and effort | About eight hours a week | Neutral |
| Appreciation of assets | Kiln and wheel depreciate | Hobby |
| Success in other activities | Runs a profitable bookkeeping practice | Business, slightly |
| History of losses | Four straight years, no profits | Hobby |
| Occasional profits | None | Hobby |
| Financial status | Losses offset substantial other income | Hobby |
| Personal pleasure | Described as relaxation | Hobby |
The presumption does not help: Elena has had no profitable year. Nickerson offers the strongest support for her, since four years could be described as a start-up period, and the 2024 price increase and consignment arrangement show some effort to improve results. But the taxpayers in Nickerson had a plan, a property being restored for a specific commercial purpose and businesslike conduct. Elena has none of those, and her losses are not shrinking in a pattern that points to profit. Under the Tax Court's test, the question is what she genuinely set out to do, and the facts that would show one, separate books, a plan, tracking which products make money, are missing. Her success as a bookkeeper cuts slightly the other way, since a professional bookkeeper who keeps no books for this activity looks more like someone pursuing a pastime.
Tax Effect for 2024
If treated as a hobby, the $3,900 of sales is reported as other income and none of the $5,600 of expenses is deductible. At the couple's 12 percent marginal rate, that adds about $468 of income tax. If treated as a business, the $1,700 loss would reduce both taxable income and self-employment income: about $160 of income tax after the qualified business income deduction effect, and about $240 of self-employment tax. The difference between the two treatments is roughly $870 for 2024.
Conclusion and Recommendations
On these facts, the pottery activity is more likely than not an activity not engaged in for profit for 2024. The return should report the $3,900 of sales as hobby income with no deduction. This conclusion is a judgment on the weight of the factors, and a court could see a start-up business, but claiming the loss would invite a dispute the client would probably lose.
If Elena wants the activity treated as a business in future years, five steps would strengthen her position: open a separate bank account and keep simple books; write a one-page plan with sales and cost targets; track hours and sales by product and drop items that lose money; pursue wholesale or consignment accounts that could produce volume; and document each change. If she reaches a profit in three of the next five years, the presumption would shift the burden to the IRS.
References
Dreicer v. Commissioner, 78 T.C. 642 (1982).
Internal Revenue Service. (2024). Taxable and nontaxable income (Publication 525). U.S. Department of the Treasury.
Nickerson v. Commissioner, 700 F.2d 402 (7th Cir. 1983).
What the ACC 330 Module 4 instructions ask for
Project One in ACC 330 usually asks you to research a tax question for a client and present the answer in a research memo. Expect a standard structure: facts, issue or issues stated as questions, authorities such as Code sections, regulations, rulings and cases, analysis that applies the authorities to the facts, conclusion and recommendations. Many versions require a minimum number of primary authorities and a short client letter or summary. State the issue narrowly, distinguish primary from secondary authority, apply each authority to specific facts rather than summarizing it, and quantify the tax effect where you can. A memo that reaches a clear conclusion with appropriate qualifications scores better than one that only lists possibilities.
How this ACC 330 Module 4 project one example is built
The memo addresses a bookkeeper who has sold pottery since 2021, with losses of $2,900, $2,100, $1,500 and $1,700. It states the issue as whether the activity is engaged in for profit under section 183. Authorities include the regulation's nine factors, the presumption of profit in three of five years, Dreicer's actual and honest profit objective and Nickerson's recognition that start-up losses do not defeat a profit motive. A factor table weighs each against the facts: no separate account or plan, enjoyment, steady losses, but rising prices and formal training. Hobby treatment taxes the $3,900 of sales with no deductions, a difference of about $870. The conclusion is hobby treatment, with five steps to revisit next year.
Where the ACC 330 Module 4 rubric puts the points
Rubrics for ACC 330 Project One typically score the statement of facts and issue, the identification and use of authorities, the analysis, the conclusion and recommendations, and the memo's format and writing. The top band requires primary authorities cited correctly, each applied to specific facts, and a conclusion that follows from the weight of the analysis with honest qualifications. Graders reward quantifying the tax consequences and recommending practical next steps. Common deductions include citing only secondary sources, restating the nine factors without applying them, ignoring the effect of the 2017 law on hobby expenses and reaching a conclusion that the analysis does not support. A clean memo format matters.
ACC 330 Module 4 help: the mistakes that cost points
Research memos most often slip by summarizing authorities instead of applying them, by framing the issue so broadly that no single answer is possible, or by stating the client's preferred conclusion without weighing the factors that cut the other way. Students also forget that since 2018 hobby expenses are not deductible at all, which makes the stakes higher than older textbooks suggest. If your research question involves a home office, a vacation home, worker classification or a casualty loss, the same memo structure applies and we can build it around your facts. Write the conclusion first in one sentence, then make sure every paragraph of analysis supports or qualifies it.
Get ACC 330 Module 4 written to your instructions
Send the ACC 330 Project One research question, the client facts and the rubric. The memo will state the issue, set out the authorities, apply them to the facts with a clear conclusion and explain the tax effect and next steps. No charge applies to your first one, and two days is the usual wait. The paper above is an original model document written by our desk, not a submitted student paper and not an official Southern New Hampshire University document.
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ACC 330 Module 4 questions, answered
Where can I find a free ACC 330 Module 4 Project One sample?
This page shows a full ACC 330 Module 4 Project One research memo on whether a pottery sideline is a hobby or a business under section 183.
What are the nine hobby loss factors?
Manner of carrying on the activity, expertise, time and effort, expectation that assets will appreciate, success in other activities, history of income or losses, amount of occasional profits, financial status of the taxpayer and elements of personal pleasure.
What is the three-of-five-year presumption?
If an activity shows a profit in at least three of five consecutive years, it is presumed to be engaged in for profit, shifting the burden to the IRS.
Can hobby expenses be deducted after 2017?
Not for tax years 2018 through 2025. Hobby income is fully taxable, but the related expenses, formerly miscellaneous itemized deductions, are suspended.
What should a tax research memo include?
Facts, issues, authorities, analysis applying the authorities to the facts, a conclusion and recommendations, written so another professional could follow and verify the reasoning.