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Leo is a self-employed architect who maintains a qualifying office in his home. Leo has $80,000 gross income from his practice and incurs $72,000 in salaries, supplies, computer services, etc. In addition, Leo's mortgage interest and real estate taxes allocable to the office total $3,000. Additional other home office expenses total $9,000 and consist of depreciation, utilities, insurance, and maintenance. Leo's total home office deductions are:_______.
A) $10,000.
B) $15,000.
C) $20,000.
D) $95,000.

Respuesta :

jepessoa

Answer:

$8,000 (they cannot exceed total income ⇒ business expenses + home office deductions ≤ $80,000)

Explanation:

The Tax Cut and Jobs Act established a maximum of $5,000 (single filers) deduction for property taxes (so Leo's real estate tax qualifies), and since Leo is self-employed, he can also deduct mortgage interest.

Other office expenses can be deducted either total if they only apply to the home office or partially if they apply to the entire house, and must be assigned proportionally. These expenses generally include insurance, utilities, repairs, security system expenses, maid service, garbage disposal, and decorating expenses.

There are two ways to determine the amount of home office deduction:

  1. the simplified method which allocates $5 per square foot of home office (we are not given any measurement)
  2. you can add all you business expenses and they allocate a percentage. Here we can assume that the calculation has already been done by Leo. In this case, Leo's home office deduction + business deductions exceed his total income, so they are limited to = $80,000 - $72,000 = $8,000. The rest must be carried over to next year.