Question

Leo is a self-employed architect who maintains a qualifying office in his home. Leo has $80,000 gross income from his practice and incurs $72,000 in salaries, supplies, computer services, etc. In addition, Leo's mortgage interest and real estate taxes allocable to the office total $3,000. Additional other home office expenses total $9,000 and consist of depreciation, utilities, insurance, and maintenance. Leo's total home office deductions are:_______.

A) $10,000.
B) $15,000.
C) $20,000.
D) $95,000.

Answer 1

Leo's total home office deductions include explicit costs of $72,000 and home office deductions totaling $12,000. However, since his gross income is $80,000, the deductions are limited to this amount.

Step-by-step explanation:

Leo, a self-employed architect, has $80,000 gross income from his practice. To calculate Leo's total home office deductions, we need to consider both the explicit costs associated with his business and the home office deductions. The explicit costs include $72,000 in salaries, supplies, computer services, etc. The home office deduction includes mortgage interest and real estate taxes totaling $3,000, plus additional expenses of $9,000 which consists of depreciation, utilities, insurance, and maintenance.

Here's the step-by-step calculation:

However, this amount cannot exceed the gross income of the practice. Since Leo's gross income is $80,000, the total deduction cannot exceed this amount. Therefore, his total home office deductions are limited to $80,000.

Answer 2

$8,000 (they cannot exceed total income ⇒ business expenses + home office deductions ≤ $80,000)

Step-by-step explanation:

The Tax Cut and Jobs Act established a maximum of $5,000 (single filers) deduction for property taxes (so Leo's real estate tax qualifies), and since Leo is self-employed, he can also deduct mortgage interest.

Other office expenses can be deducted either total if they only apply to the home office or partially if they apply to the entire house, and must be assigned proportionally. These expenses generally include insurance, utilities, repairs, security system expenses, maid service, garbage disposal, and decorating expenses.

There are two ways to determine the amount of home office deduction:

1. the simplified method which allocates $5 per square foot of home office (we are not given any measurement)
2. you can add all you business expenses and they allocate a percentage. Here we can assume that the calculation has already been done by Leo. In this case, Leo's home office deduction + business deductions exceed his total income, so they are limited to = $80,000 - $72,000 = $8,000. The rest must be carried over to next year.