Question

Oscar is self-employed and would like to know what kind of deduction he could get for...

  1. Oscar is self-employed and would like to know what kind of deduction he could get for his home office. He has gross income from his business of $210,000. His total home square footage is 1,900. The square footage of her office is 150. Total utilities $700. Total home mortgage interest $10,000. Total real estate taxes $4,200.
  1. Explain to Oscar the two options for calculating the home office deduction.
  2. Based on the information provided what would be Oscar’s deduction be under both options and which option would you recommend?
  3. What information should you discuss with Oscar regarding the requirements of taking this deduction?
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Answer #1

a. The options available for calculating home office deduction are :

1. Show the entire home as being used for the business, so that the expenses/liabilities of home can be set of against the gros income from business.

2. Claim deduction for each of the liability (utilty, Home mortgage interest and real extate taxes) by multiplying each of them with 150/1900.This approach provides the prorated deduction by allocating each of the expense proportioantely taking the square footage as the driver.

b. For option 1 above, Oscar can avail deduction of $14,900 from his gross income of $210,000.

For option 2 the deduction will be 14900*150/1900, which equals $1176.

Clearly Option 1 is peferable.

c. For taking the deduction under option 1, the legal requirements of incorporating the business would be to show the entire home as office or place of business.

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