Question

[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 $5,920. 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	$	1,760
Interest on home mortgage		5,340
Operating expenses of home		880
Depreciation		1,696

Also, assume that, not counting the sole proprietorship, Rita’s AGI is $63,200.

Assume Rita’s consulting business generated $15,800 in gross income. (Leave no answer blank. Enter zero if applicable.)

rev: 10_31_2018_QC_CS-146132

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

b. What would Rita’s home office deduction be if her business generated $10,800 of gross income instead of $15,800? (Answer for both the actual expense method and the simplified method.)

c. Given the original facts, what is Rita’s AGI for the year?

d. Given the original facts, what types and amounts of expenses will she carry over to next year?

Answer 1

a)

Gross Income	15800
Less: Business expenses	(5920)
Balance	9880
Less: Tier 1 expenses ($1760 + $ 5340)	(7100)
Balance	2780
Less: Tier 2 expenses (i.e. operating Expenses of home)	(880)
Balance	1900
Less: Tier 3 expenses (i.e. Depreciation)	(1696)
Net business income	204

Hence, Rita's home office expenses allowable are $7100 + $880 + $1696 = $9676 .

b)

Gross Income	10800
Less: Business expenses	(5920)
Balance	4880
Less: Tier 1 expenses ($7100 before limit)	(7100)
Balance	(2220)
Less: Tier 2 expenses ($880 before limit)	0
Balance	(2220)
Less: Tier 3 expenses ($1696 before limit)	0
Net business income	(2220)

Rita's home office expenses allowable under actual expense method would be $7100 if business generated gross income $10800 i.e. only property taxes & interest on home mortgage are allowed. Remaining expenses (Tier 2 + Tier 3) would be carried over to next year.

Under Simplified method simply deduct $5 for every square feet of home office subject to maximum of $1500 per year.

Hence, Rita's home office deduction will be limited to $1500 (300*$5). However expenses relating to interest & taxes can be claimed as itemized deductions. Therefore, Total deductions will be $7100 + $1500 = $8600 .

c) Rita's AGI = $63200 + $204 = $63404

d) Considering the original facts Rita is allowed to take full benefits of all expenses & hence she will not carry any expenses to next year.