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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 e. Assume that Brooke uses the simplified method for computing home office expenses. 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 what home office expenses, if any, would she carry over to next year

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Answer:

The Total expenses of the amount allocated to the home office is $35, 600, the total amount of the tier 1, 2, and 3 expenses were $2306, finally, Brooke may deduct $494 of depreciation expense and carry the remaining $306 over to the following year.

Explanation:

The first step is to know what amount each of this expenses is allocated to the home office.

Expense             Amount        Type     Allocated to home office 6.6% of indirect

                                                                            (300/4, 500 square feet.)

Real property taxes $3,600    Indirect              $240

Interest on home

Mortage                    14,000      Indirect              933

Operating expense

of home                     5000       Indirect               333

Depreciation             12,000     Indirect               800

Repairs to home

theater room              1000       Unrelated             0

Total expenses          $35,600                              $2,306

The next step is to find the total amount of tier 1, tier 2, and tier 3 expenses allocated to the office.

  • expenses  for Tier 1 : $1,173 which is $240 real property + $933 of interest home mortgage
  • expenses for Tier 2: $333 (operating expenses of the home)
  • expenses for ties 3 : $800 depreciation.

For the last step thus saying we solve thus:

Now,

$2000 home office expense in total and $306  depreciation expense carry to the next year.

From her  $2,000 of Schedule C net income before she would subtracts all $1,173 from tier 1 expenses and all $333 from tier 2 expenses. this leaves $494 ($2000- $1,173 - $333) of net income before depreciation (tier 3 expense)

Because the home office deduction can reduce net income to $0, brooke may deduct $494 of depreciation expense and carry the remaining $306 over to the following year.

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