Question

Martin Galloway, the sole propiertor of a consulting business, has gross receipts of $45,000 in 2017. His adresss is: 1223 Fairfield Street, Westfield, New Jersey and his SSN is 158-68-7799. Expenses paid by his business are

Advertising $500

Supplies 2,900

Taxes and licenses 500

Travel (other than meals) 600

Meals and entertainment 400

Health insurance premiums (for Martin) 1,400

Individual retirement account contribution 2,500

During the year Martin drives his car a total of 15,000 miles (700 business miles and 550 personal miles per month). He paid $100 for business-related parking and tolls. He paid $120 in fines for speeding tickets when he was late for appointments with clients. Martin's office is located in his home. HIs office occupies 500 and 2,000 square feet in his home. His total (unallocated) expenses for his home are:

Mortgage interest $6,000

Property taxes 1,700

Insurance 700

Repairs and maintenance 300

Utilities 1,600

Depreciation for the business portion of his home is $1,364.

a. What is Martin's net income (loss) from his business?

b. How much self-employment tax must Martin pay?

c. Based on this information, are there any other deductions that Martin can claim on his individual tax return other than those reported on his Schedule C?

d. How would your answers to the above items change if Martin elects to use the simplified method for home expenses?

Answer 1

A. Computation of Martin 's Net Income (Loss) from His Business
Particulars	Amount ($)
Gross Receipt		$45,000
Advertising	$500
Supplies	$2,900
Taxes and license	$500
Travel (Other than meals)	$600
Meals ($400 * 50%)	$200
Auto Expense	$3,000
Parking and Tolls	$100
Home Office Expense*	$3,939
Total Expense		$11,739
Net Income		$33,261

*Home office expense: 500/2,000 * $10,300 total expense other than depreciation= $2,575 + $1,364 depreciation for office = $3,939

(B) Self Employement income Tax = $33,261 * 92.35% * 15.3% = $4,700

(C) Martin may claim the following additional deductions for AGI: ;

$2,350 (1/2 of self-employment taxes)

$1,400 health insurance premium

$2,500 contribution to his IRA

itemized deductions of $5,775 (1500 / 2000 * $7,700 interest and taxes)

$120 for speeding tickets is not deductible

(D) The simplified option that allows him to deduct $5 per square foot up to 300 square feet = $1,500 for his home office expenses without requiring an allocation of mortgage interest and taxes.