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24 September, 07:11

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 $ 3,600

Interest on home mortgage 14,000

Operating expenses of home 5,000

Depreciation 12,000

Repairs to home theater room 1,000

Assume Brook's consulting business generated $50,000 in gross income for the current year.

a. What is the Brooke's home office deduction for the current year?

b. What is Brooke's AGI for the year?

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Answers (1)
  1. 24 September, 10:10
    0
    a. The total home office deduction is $6,973.33

    b. Total Adjusted gross income is $43,026.67

    Explanation:

    A. To compute the total home office deduction, we must divide proportionately the related expenses of the house based on the area that the home office has occupied.

    Real property tax $3,600

    Interest on home mortgage 14,000

    Depreciation 12,000

    total $29,600 x 300 / 4,500 = 1,973.33

    So, 1,973.33 + 5,000 = $6,973.33

    *operating expenses is chargeable to the home office at whole amount because it was incurred by the business alone.

    *Repair to home theater is not chargeable to the home office because it is purely personal expense of the house.

    B. Adjusted Gross Income

    $50,000 - 6,973.33 = $43,026.67
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