Question

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?

Answer 1

Brooke's home office deduction is $2,307.82, which represents 6.67% of her total home-related expenses, excluding repairs that don't affect the office space. After deducting this amount from her gross income of $50,000, her adjusted gross income (AGI) would be $47,692.18 for the year.

Step-by-step explanation:

To calculate Brooke's home office deduction, we need to determine the portion of her home expenses that can be attributed to her home office. The percentage of the home used for the office is calculated by dividing the square footage of the office (300 square feet) by the total square footage of the home (4,500 square feet), which gives us 6.67% (300/4500).

The deductible home office expenses are a portion of the total home expenses that relate to the business use of the home. Calculating these expenses:

• Real property taxes: $3,600 * 6.67% = $240.12
• Interest on home mortgage: $14,000 * 6.67% = $933.80
• Operating expenses of home: $5,000 * 6.67% = $333.50
• Depreciation: $12,000 * 6.67% = $800.40
• Repairs to home theater room are not deductible as they do not affect the office area.

Total home office deduction:
$240.12 (taxes) + $933.80 (interest) + $333.50 (operating expenses) + $800.40 (depreciation) = $2,307.82

To calculate Brooke's Adjusted Gross Income (AGI), you subtract the home office deduction from the gross income:

Gross Income: $50,000
Home Office Deduction: -$2,307.82
Adjusted Gross Income: $47,692.18

Answer 2

a. The total home office deduction is $6,973.33

b. Total Adjusted gross income is $43,026.67

Step-by-step 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