Question

Melanie is employed full-time as an accountant for a national hardware chain. She recently started a private consulting practice, which provides tax advice and financial planning to the general public. For this purpose, she maintains an office in her home. Expenses relating to her home for 2014 are as follows:

Real property taxes$3,600
Interest on home mortgage$3,800
Operating expenses of home $900

Melanie's residence cost $350,000 (excluding land) and has living space of 2,000 square feet, of which 20% (400 square feet) is devoted to business. The office was placed in service in February 2013, and under the regular method, Melanie had an unused office in the home deduction of $800 for 2013. Presuming sufficient net income from her consulting practice, what is Melanie's office in the home deduction under the:

a. Regular method
b. Simplified method

Answer 1

(a) $3,455

(b) $1,500

Step-by-step explanation:

(a) Regular method deduction:

Real property tax = $3,600 × 20% of the area used for business

= $720

Interest on home mortgage = $3,800 × 20% of the area used for business

= $760

Operating expense = $900 × 20% of the area used for business

= $180

Depreciation = $350,000 × 2.564% × 20%

= $1,795

Home deduction under regular method:

= $720 + $760 + $180 + $1,795

= $3,455

Note: 2.564% is in MACRS Straight-Line Depreciation for Real Property Assuming Mid-Month Convention (Percentage Rates) TABLE. @ 39 recovery years, at 2 month column of February when the office was placed in service.

(b) Simplified method deduction:

Under this method of deduction, the home deduction should be $5 per square foot that are used for the business purposes subject to a maximum of 300 feet.

We know that Melanie is using 400 square feet.

Hence, the maximum deduction for office:

= 300 square feet × $5 per square feet

= $1,500