Question

Fenny 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 350 square feet and the entire house is 4,000 square feet. Fenny incurred the following home-related expenses during the year. Unless indicated otherwise, assume Fenny uses the actual expense method to compute home office expenses.

Real property taxes	$ 4,200
Interest on home mortgage	15,400
Operating expenses of home	6,000
Depreciation	16,500
Repairs to home theater room	1,200

A. What amount of each of these expenses is allocated to the home office?

B. What are the total amounts of tier 1, tier 2, and tier 3 expenses, respectively, allocated to the home office?

C. If Fenny reported $2,500 of Schedule C net income before the home office expense deduction, what is the amount of her home office expense deduction and what home office expenses, if any, would she carry over to next year?

D. What is the total amount of from AGI deductions relating to the home that Fenny may deduct in the current year?

E. Assuming Fenny reported $2,500 of Schedule C income before the home office expense deduction, complete Form 8829 for Fenny’s home office expense deduction. Also assume the value of the home is $550,000 and the adjusted basis of the home (exclusive of land) is $514,821.

F. Assume that Fenny uses the simplified method for computing home office expenses. If Fenny reported $2,500 of Schedule C net income before the home office expense deduction, what is the amount of her home office expense deduction and what home office expenses, if any, would she carry over to next year?

Answer 1

A. Calculation of Allocation of expense to home Office
Particular	Total Expense	Basis (350/4000)Sq.Ft	Expenses Allocated
Real Property Tax	$       4,200.00	Size of Area	$                        367.50
Interest on Home Mortage	$     15,400.00	Size of Area	$                    1,347.50
Operating Expenses of Home	$       6,000.00	Size of Area	$                        525.00
Depreciation	$     16,500.00	Size of Area	$                    1,443.75
Repairs to home theatre room	$       1,200.00	unrelated	$                                 -
B. Classification
Tier 1- Real Property + Interest on Home Mortage
= 367.50+1347.50 = 1,715
Tier 2- Operating Expenses
= 525
Tier 3- Depreciation
=1,443.75
C.
If Fenny reported $ 2,500 income in Schedule -C ,then she can deduct
all teir 1 expenses i.e, 367.50 then she can deduct Tier 2 expense i.e, 1,347.50
So, Balance income will be $ 785 .Hence he can deduct 785 as depreciation
and caary forward the balance depreciation to next year.
C. Total Amount of AGI deduction is $ 3,683.75
D.
E.
Home office expense deduction is $1,750 (350 square feet × $5.00 per square foot) with zero carryover.
The gross income limit does not apply here because the Schedule C net income before the home office expense deduction ($2,500)
exceeds the home office expenses of $1,750. Note that taxpayers cannot carryforward expenses calculated using the
simplified method to the next year even when the gross income limits the amount of the home office expense deduction.