Question

Colin, a self-employed consultant, uses a room of his home as a business office. This room represents 10 percent of the home’s square footage. This year, Colin incurred the following expenses in connection with his home: Use Table 7-3 and Table 7-4. Home mortgage interest $ 12,980 Property tax on residence 2,200 Homeowner’s insurance 1,475 Utilities 2,100 Furnace repairs 300 Colin purchased the home in 2000 for $225,000. For MACRS depreciation purposes, he allocated $185,000 to the building and $40,000 to the land. Required: If Colin’s gross business income exceeded his operating expenses by $75,000, compute his net profit for the year. If Colin’s gross business income exceeded his operating expenses by $1,800, compute his net profit for the year.

Answer 1

Answer:

i.

Compute net profit for the year ,if Colin’s gross business income exceeded his operating expenses by $75,000:

Particulars	Amount	Amount
Total annual housing exp	= $ 12,980+$ 2,200+$ 1,475+$ 2,100+$ 300 = $ 19,055	$19,055
Home’s square footage percent	given	10%
Expenses to be allocated to office	= $ 19,055*10% = $ 1905.5	$ 1,906
MACRS dep	= ($ 1,85,000/39yrs)*10% = $ 474.35	$ 474
Net profit before allocation of home office deduction		$75,000
Less: Home office deduction	= $ 1,906 + $ 474 = $ 2,380	$ 2,380
Net profit of the year	= $ 75,000 - $ 2,380 = $ 72,620	$72,620

Therefore ,Net profit for the year is $ 72,620.

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ii.

Compute net profit for the year,If Colin’s gross business income exceeded his operating expenses by $1,800:

Particulars	Amount	Amount
Net profit before allocation of home office deduction		$ 1,800
Less: Home office deduction		$ 1,800
Net profit for the year	= $ 1,800 - $ 1,800 = $ 0	$ 0

Note:

Home office deduction is threshold limit to profit before deduction that is $ 1,800,

Therefore,Net profit for the year is $ 0