Question

Rhea is a self-employed professional singer. She resides in a rented apartment and uses one room exclusively as a business office. This room includes 440 of the 2,200 square feet of living space in the apartment. Rhea performs in recording studios and concert halls, but she conducts all of the administrative duties with respect to the business in her home office. This year, Rhea’s apartment rent was $55,000. She paid $5,900 to a housekeeping service that cleaned the entire apartment once a week and $2,700 for renter’s insurance on the apartment furnishings. Compute Rhea’s home office deduction assuming that her net profit before the deduction was $370,000. Compute Rhea’s home office deduction assuming that her net profit before the deduction was $4,700.

Answer 1

To compute Rhea's home office deduction, we need to determine the percentage of her apartment that is used as a business office. Rhea uses one room out of the 2,200 square feet of living space in her apartment, which is 440 square feet. The calculation would be 440/2,200 = 0.2 or 20%. This means that 20% of Rhea's apartment is used as a home office. To calculate the deduction, we multiply the allowable expenses by the percentage of the apartment used as a home office.

Step-by-step explanation:

To compute Rhea's home office deduction, we need to determine the percentage of her apartment that is used as a business office. Rhea uses one room out of the 2,200 square feet of living space in her apartment, which is 440 square feet. The calculation would be 440/2,200 = 0.2 or 20%. This means that 20% of Rhea's apartment is used as a home office.

Next, we need to calculate the allowable expenses for Rhea's home office. The allowable expenses include a portion of her rent, housekeeping service, and renter's insurance. To calculate the home office deduction, we multiply the allowable expenses by the percentage of the apartment used as a home office. Let's calculate the deduction for each scenario:

Net profit = $370,000

Rent deduction: $55,000 * 0.2 = $11,000

Housekeeping service deduction: $5,900 * 0.2 = $1,180

Renter's insurance deduction: $2,700 * 0.2 = $540

Total home office deduction: $11,000 + $1,180 + $540 = $12,720

Net profit = $4,700

Rent deduction: $55,000 * 0.2 = $11,000

Housekeeping service deduction: $5,900 * 0.2 = $1,180

Renter's insurance deduction: $2,700 * 0.2 = $540

Total home office deduction: $11,000 + $1,180 + $540 = $12,720

Answer 2

Answer: A - Net Profit $357,280

B - Net Loss = $(8020)

Explanation: Rhea uses a 440 of 2200 square feet living space for her business office.

440/2200*55000 (rent) = $11,000

440/2200*5900 (house keeping =$1,180

440/2200 * 2700(insurance) =$540

Net Profit before deduction $370,000

Net profit after deduction = $370,000-$11,000-$1,180-$540 = $357,280

Net Profit before deduction $4,700

Net loss after deduction = $4,700-$11,000-$1,180-$540=$(8020)