Question

Rita owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home (500 square feet) where she meets with clients, prepares bills, and performs other work-related tasks. Her business expenses, other than home office expenses, total $6,000. The following home-related expenses have been allocated to her home office under the actual expense method for calculating home office expenses. Real property taxes Interest on home mortgage Operating expenses of home Depreciation $1,800 5,400 900 1,720 Also, assume that, not counting the sole proprietorship, Rita's AGI is $64,000. Assume Rita's consulting business generated $16,000 in gross income. (Leave no answer blank. Enter zero if applicable.) a. What is Rita's home office deduction for the current year? Home office deduction

Answer 1

Part A

Gross Income	16000
Less: business expenses	(6000)
Balance	10000
Less: Tier 1 expenses (interest $5400 + $1,800 taxes)	(7200)
Balance after Tier 1 expenses	2800
Less Tier 2 expenses (operating expenses)	(900)
Balance after Tier 2 expenses	1900
Less Tier 3 expenses (depreciation)	(1720)
Net income from business	$180

Rita’s home office deduction (actual method) = 7200+900+1720 = $9820

According to simplified method, Rita’s home office deduction = $1,500 (300 square feet × $5 application rate). Moreover, she can deduct all of the $7200 for interest and taxes as itemized deductions. Therefore, total deduction = $1,500 + $7200 = $8,700 of deductions.

Home office deduction is greater of home office deduction according to actual method and home office deduction according to simplified method.

Part B

Gross Income	11000
Less: business expenses	(6000)
Balance	5000
Less: Tier 1 expenses (interest $5,400 + $1,800 taxes)	(7200)
Loss after Tier 1 expenses	(2200)
Less Tier 2 expenses (operating expenses)	0
Loss after Tier 2 expenses	(2200)
Less Tier 3 expenses (depreciation)	0
Net Loss from business	(2200)

Only the mortgage interest and real property taxes are allowed to be allocated to the business use of the home. Tier 2 and tier 3 are suspended and carried over to next year.

Part C

Rita’s AGI is $64180 for the year. Rita’ AGI = AGI without the sole proprietorship + net income from the business ($64,000 + $180).

Part D

Tier 1 expenses carried over to next year	$0
Tier 1 expenses carried over to next year	$0
Tier 1 expenses carried over to next year	$0

Rita is allowed to deduct all of the expenses this year. Therefore, no carry over to the next year.