Question

Mr. Ben Barns wanted to start a home based business that would specialize in selling t-shirts. The business would be operated from his principal residence. He set aside 20% of the total floor space in the residence for the t-shirt operations. Mr. Ben Barns’ principal residence, costing $ 950,000 in total, was acquired on January 01, 2016. It is estimated that $ 350,000 of this total value can be attributed to the land value. Mr. Ben Barns incurred the following 2016 costs relating to the principal residence: $ 2,500 Utilities For The Home (Heat, Light, And Water) $ 7,000 Mortgage Interest Paid $ 4,500 House Insurance $ 8,000 Property Taxes $ 6,000 Repairs & Maintenance For The Home ———— $28,000 Total Costs The business commenced operations on March 01, 2016. On that date, Mr. Ben Barns purchased the following assets to be used in his new business: $30,000 Office Furniture & Storage Shelving $ 3,000 Computer $ 1,000 Business Software In addition, Mr. Ben Barns had a separate telephone line installed for dealing with the mail order business. During the period March 01, 2016 through December 31, 2016, Mr. Ben Barns’ mail order sales totaled $ 450,000. Costs associated with these sales included the following: $250,000 Cost Of Merchandise Sold $ 50,000 Unsold Merchandise (Lower Of Cost And Fair Market Value) $ 7,000 Packaging Materials $ 10,000 Mailing Costs $ 4,000 Office Supplies $ 3,000 Telephone Charges $ 6,000 Printing Of Brochures Required: Can Mr. Ben Barns deduct work space in the home costs? Briefly explain your decision. Calculate Mr. Ben Barns’ 2016 minimum net business income or loss that he will report on his 2016 income tax return. Briefly discuss any issues that should be discussed with Mr. Ben Barns regarding the work space in his home and business costs

Answer 1

The land value of $350,000 mentioned is assumed to be land usedby the businesss.

Can Mr. Ben Barns deduct work space in the home costs?

The home is one legal entity and cannot be purchased by the company/ business in parts. Neither the space could be rented out. All the expnses of the house could be added (to the extent of 20%) to the business A working could be made where the company has to pay 60- 70% of home expenses (utility, etc) (charge for using 20% of the residence).

Below table assumes profit and losss considering 60% of utilities are charged to business

Issues to be discussed with Mr.Ben : There could be legal issues, where commercial activity is being carried out in resdidential premises.

Principal Residence
Cost of Ben's Principal Residence	950000
Land Value	350000
Utlities	2500
Mortgage	7000
House Insurance	4500
Property Taxes	8000
Repairs and Maintainance	6000
	28000
Assets
Furniture and storage Shelving	3000
Computer	1000
March 01- Dec 01,2016
Sales	450000
Cost of Merchadise Sold	250000
Packing Materials	7000
Mailing costs	10000
Office Supplies	3000
Other Expenses	16800
Telephone	6000
	292800