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 in connection with his home:

• 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.

a. If Colin’s gross business income exceeded his operating expenses by $75,000, compute his net profit for the year.

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

Answer 1

Calculation of Total Expense Incurred by Colin in connection with his home:[Refer Note 1]

Particulars	Amount($)
Home Mortgage Interest	12,980
Property tax on residence	2,200
Homeowner's insurance	1,475
Utilities	2,100
Furnace Repairs	300
Total Expense	19,055

But, since the business office represents 10 percent of the home's square footage

Therefore,10% of the total expense of the home attributed to business expense=10% * 19,055=$1,906(approx.).

a)When Colin’s gross business income exceeded his operating expenses by $75,000:

Net profit for the year =$75,000-10% of the total expense of the home attributed to business expense

=$75,000-$1,906=$73,094

b)When Colin’s gross business income exceeded his operating expenses by $1,800:

Net profit for the year =$1,800-10% of the total expense of the home attributed to business expense

=$106(Net Loss)

Note 1:

For the total amount of MACRS depreciation purposes, he allocated $185,000 to the building and $40,000 to the land is adjusted against the purchase price of the home so the expense related to depreciation is not taken into account while calculating the total expense incurred  in connection with his home.