Question

Rita owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home (500 square feet) where she meets with clients, prepares bills, and performs other work-related tasks. Her business expenses, other than home office expenses, total $5,600. The following home-related expenses have been allocated to her home office under the actual expense method for calculating home office expenses.

Real property taxes	$	1,600
Interest on home mortgage		5,100
Operating expenses of home		800
Depreciation		1,600

Also, assume that, not counting the sole proprietorship, Rita's AGI is $60,000. Rita itemizes deductions, and her itemized deduction for non-home business taxes is less than $10,000 by more than the real property taxes allocated to business use of the home.

Assume Rita’s consulting business generated $13,000 in gross income for the current year. Further, assume Rita uses the actual expense method for computing her home office expense deduction.

a. What is Rita’s home office deduction for the current year?

b. What is Rita’s AGI for the year?

c. Assuming the original facts, what types and amounts of expenses will she carry over to next year? (Leave no answer blank. Enter zero if applicable.)

	Amount Tier 1 expenses carried over to next year Tier 2 expenses carried over to next year Tier 3 expenses carried over to next year

Answer 1

a.

Gross Income	$ 13,000.00
less Business expenses	$    5,600.00
Balance	$    7,400.00
less Tier 1 expenses (Real property taxes +Interest on home mortgage (1600+5100)	$    6,700.00
Balance	$        700.00
Tier 2 expenses (Operating expenses of home)	$        800.00
Balance	$     (100.00)
Tier 3 expenses (depreciation carried over to next year )	$                 -
Net business income	$     (100.00)

Hence rita's home expenses allowances are 1600+5100+800= 7500

The depreciation expenses will be carried over to the next year

b.

Rita's AGI = 60000+(100) = $59900

c)

ier 1 expenses carried over to next year	$0
Tier 1 expenses carried over to next year	$0
Tier 1 expenses carried over to next year	$1600