Question

Mohad uses the second floor of his home exclusively as a home office for his unincorporated business and does not have another place of work. The space of the second floor is 1,000 square feet, while the total space of his home is 4,000 square feet. In the current taxation year, his business had $10,000 of income before home office expense and he incurred the following expenses relating to his home:

Utilities and repairs
$6,000

Home insurance and property taxes
$2,000

Mortgage principal payments
$30,000

Mortgage interest
$20,000

What is the maximum amount Mohad is allowed to deduct from his business income?

Answer 1

Assumption: In Absence of Specific Information Solution is given as per USA Taxation Rules.

Answer:

The Maximum Amount that Mohad is allowed to deduct from his business income in the Current Year is $ 7,000.

Home Office Expenses can be deducted from Business Income in proportion to Space used for the Purpose of Business. In Given Case Space used for Business Purpose is 1,000 Square feet out of total 4,000 Square feet.

Mortgage Principal Payments are not eligible for Deduction from Business Income as per US Taxation Rules.

Home Office Expenses eligible for Deduction for Mohad are as follows:

1. Utilities and Repairs = $ 6,000 (Given).

2. Home Insurance & Property Taxes = $ 2,000 (Given).

3. Mortgage Interest = $ 20,000 (Given).

Total Home Office Expenses Eligible for Deduction for Mohad = $ 28,000. ($ 6,000 + $ 2,000 + $ 20,000.)

The Maximum Amount that Mohad is allowed to deduct from his business income = Total Home Office Expenses Eligible for Deduction × Space Used for Business Purpose / Total Space.

$ 28,000 (Calculated Above) × 1,000 (Given) / 4,000 (Given).

$ 7,000.

As Mohad's Business Income that is $ 10,000 is more than Eligible Deduction that is $ 7,000 so, Mohad can claim Entire $ 7,000 as Deduction in the Current Year.