Question

Brooke owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. The home office is 300 square feet and the entire house is 4,500 square feet. Brooke incurred the following home-related expenses during the year. Unless indicated otherwise, assume Brooke uses the actual expense method to compute home office expenses. Real property taxes Interest on home mortgage Operating expenses of home Depreciation Repairs to home theater room $ 3,600 14,800 5,eee 12.009 1,800 Problem 14-63 Parts a, b, and c Required: a. What amount of each of these expenses is allocated to the home office? b. What are the total amounts of tier 1. tier 2. and tier 3 expenses, respectively, allocated to the home office? c. If Brooke reported $2.000 of Schedule C net income before the home office expense deduction, what is the amount of her home office expense deduction and how much of the home office expenses, if any, would she carry over to next year? (For all requirements, Leave no answer blank. Enter zero if applicable. Do not round Intermediate calculations. Round your final answers to the nearest whole dollar amount.) Complete this question by entering your answers in the tabs below. Rega Reqb Reg

Answer 1

a	Expenses	Amount	Type	Allocated to home office
				(300/4500sq.ft) 6.667% of indirect
	Real property tax	$3600	Indirect	$240
	Interest on home mortgage	$14000	Indirect	$933
	Operating expense for home	$5000	Indirect	$333
	Depreciation	$12000	Indirect	$800
	Repairs to home theater room	$1000	Unrelated	$0
	Total expenses	$35600		$2306
b	Tier 1 expenses :	$1173 (240 real property + 933 interest on home mortgage)
	Tier 2 expenses :	$333 (operating expense for the home)
	Tier 3 expenses :	$800 (depreciation)
c	$306 depreciation expense and $2000 home office expense carryover to next year.
	Her $2000 of schedule C income before she would subtract $1173 of the tier 1 expense and all $333 of the tier 2 expesne.
	It leaves (2000-1173-333) $494 of net income before depreciation (tier 3). This is because the home office expense
	deduction reduce net income to $0 but not below . Brook may deduct $494 of depreciation expense and carry the
	remaining $306 over to next year.