Question

Mr. G, a plumber, owns his own building, which he uses exclusively in his business. On January 1 of the previous year, Mr. G purchased a residence and began using the entire basement as an office and workshop for his business. The basement constitutes his principal place of business. The size of Mr. G's residence is 2,000 square feet, including the basement, which has an area of 800 square feet. During the current year, Mr. G's net income attributable to the business uses of his home (before taking into account expenses of the home) was $10,000. In addition, Mr. G incurred the following costs with respect to his residence:

Mortgage interest $15,000
Real estate taxes 2,500
Utilities 2,000
Insurance and maintenance expenses 2,500
Assuming $1,500 of depreciation on the basement portion each year, what is Mr. G's depreciation deduction with respect to his residence under the regular method of office deduction?
A. $1,500
B. $1,456
C. $1364
D. $1,200

Answer 1

The depreciation deduction for Mr. G, who uses 40% of his home for business purposes, would be the full amount of $1,500, assuming this figure correctly represents the allocated business portion.

Step-by-step explanation:

To calculate Mr. G's depreciation deduction with respect to his residence under the regular method of office deduction, we need to determine the allowable depreciation for the business use portion of the residence. The business use area is the basement, which has an area of 800 square feet out of the total 2,000 square feet of the residence. Mr. G can depreciate the cost of the basement over its useful life, which will result in a depreciation deduction.

The formula to calculate the depreciation deduction is:

Depreciation deduction = (Cost of basement / Useful life of basement) * Percentage of business use

In this case, Mr. G incurred a depreciation expense of $1,500 on the basement portion each year. Since the basement is 800 square feet out of the total 2,000 square feet, the percentage of business use is 40% (800 / 2000 = 0.4).

Therefore, the depreciation deduction for Mr. G's residence under the regular method of office deduction is:

Depreciation deduction = ($1,500 / Useful life of basement) * 0.4