Question

6. Anna operates a child care service from her home. Her gross business income for 2015 amounted to $42 350. Her tax-deductible business expenses consisted of the following: Advertising $1700 Dues, memberships, subscriptions 520 Motor vehicle expenses 1115 Supplies 582 Meals and entertainment 495 Other expenses 437 Anna can also deduct home expenses, such as utilities, property taxes, house insurance, mortgage interest, and maintenance for the business use of a workspace in her home. The amount that may be deducted is a proportion of the total annual home expenses allocated to the workspace on a reasonable basis, such as area or number of rooms. Anna’s eligible home expenses for the year were: Heat $3750 Power 2480 Water 610 House insurance 1420 Maintenance 1930 Mortgage interest 6630 Property taxes 3260 Other expenses 690 The house covers 345 square metres and consists of eight rooms. Anna uses one room with an area of 45 square metres as her business office. Questions a. What portion of her eligible home expenses may Anna claim as tax-deductible expenses if the expenses are allocated on the basis of i. area? ii. number of rooms? b. What is her net business income if Anna allocates home expenses on the basis of area? c. For most individuals, basic federal income tax equals the federal tax calculated according to Table below, less non-refundable tax credits. What is Anna’s basic federal income tax if she reports a non-refundable tax credit in 2015 of $11 138?

Answer 1

A)

CALCULATION OF TOTAL ELIGIBLE HOME EXPENSES
Particulars	Amount
Heat	3750
Power	2480
Water	610
House Insurance	1420
Maintainence	1930
Mortgage Interest	6630
Property Taxes	3260
Other Expenses	690
Total	20770

	Apportionment on the basis of Area
A	Total area	345
B	Area used for business	45
C	Ratio (B/A)	0.1304
D	Total Expense	20770
E	Expense eligible for Deduction ( C * D)	2709

	Apportionment on the basis of Room
A	Total Rooms	8
B	Rooms used for business	1
C	Ratio (B/A)	0.125
D	Total Expense	20770
E	Expense eligible for Deduction ( C * D)	2596

Calculation of Net Income ( home expenses Allocated on the basis of Area)
Particulars	Amount ($)
Gross Business Income	42350
Less
1) Advertising	1700
2) Dues, Memberships	520
3) Motor Vehicle expense	1115
4)Supplies	582
5) Meals and Entertainment	495
6) Other Expenses	437
7) Eligible Home Expenses	2709
Net Business Income Before Tax	34792

For part C tax rates not provided