Question

Sally has a full-time job as an accountant with a large corporation. In her spare time, she prepares tax returns in a spare room of her home. Most of her business comes from friends and referrals from former clients. Typically, clients drop of their materials at Sally's house and return sometime later to review and sign the returns. The floor space of Sally's residence is 2,000 square feet and her dedicated work space is 300 square feet. Gross income from the business is $23,000; direct expenses (other than home office) are $6,000. Expenses relating to the residence are as follows: Real property taxes Interest on home mortgage Operating expenses of residence Depreciation (before applying business use percentage) $5,500 9,500 3,000 5,000 a. If Sally uses the regular (actual expense) method of computing the deduction for office in the home, what is the net income from the tax return preparation business? b. What is the net income from the business if she uses the simplified method? c. What is the impact on her itemized deduction under both methods?
will thumbs up, thanks.

Answer 1

A)	Actual Expense Method
	Proportion of work space	15%
	Gross income from business	23000
Less	Direct expenses	6000
	Real Property taxes (5500*15%)	825
	Interest on home mortgage (9500*15%)	1425
	Operating expenses (3000*15%)	450
	Depreciation (5000*15%)	750
		13550
B)	Under simplified method $5 for each square foot is deducted of home office space upto maximum of $ 1500
	Gross income from business	23000
	Deduction (300*5)	1500
		21500
C)	Itemized deduction will be limited to extent of $ 1500 in simplified method.