Question

Required information [The following information applies to the questions displayed below.] 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 $5,600. 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 $ 1,600 Interest on home mortgage 5,100 Operating expenses of home 800 Depreciation 1,600 Also, assume that not counting the sole proprietorship, Rita’s AGI is $60,000. Assume Rita’s consulting business generated $13,000 in gross income for the current year. Further, assume Rita uses the actual expense method for computing her home office expense deduction.

a. What is Rita’s home office deduction for the current year?

b. What is Rita’s AGI for the year?

c)  Assume the original facts, except that Rita is an employee and not self-employed. (She uses the home office for the convenience of her employer.) Consequently, she does not receive any gross income from the (sole proprietorship) business and she does not incur any business expenses unrelated to the home office. Finally, her AGI is $60,000 consisting of salary from her work as an employee. What effect do her home office expenses have on her itemized deductions?

	Rita's home office expenses are reduced by and she may deduct as an itemized deduction.

d. Assuming the original facts, what amount of expenses will she carry over to next year?

Amount of expenses

Tier 2 operating expenses

Tier 3 depreciation expenses

Answer 1

Answer

1.Rita’s home office deduction for the current year:

$6,700 interest and taxes + 700 home operating expenses as following:

Particulars	Amount
Gross income	13000
Less: Business expenses	(5600)
Balance	7400
Less: Tier 1 expenses (interest $5,100 + $1,600 taxes)	(6700)
Balance	700
Less: Tier 2 expenses (operating expenses upto $700)	(700)
Balance	0
Less: Tier 3 expenses (depreciation)	0
Net Income from business	0

2. Rita’s AGI is $60,000 for the year. This is her AGI without the sole proprietorship plus the net income from the business ($60,000 + $0).

3.

Rita's home office expenses are

reduced

by

$1200

and she may deduct

$7900

as an itemized deduction.

Employees who may deduct home office exp. do as itemized deduction subject to the 2% of AGI Floor.

Hence $1200($60000*2%)

4.

Amount of expenses will she carry over to next year

Amount of expenses

Tier 2 operating expenses                                             $100

Tier 3 depreciation expenses                                         $1600

Total                                                                            $1700