Question

Rocky has a full-time job as an electrical engineer for the city utility. In his spare time, Rocky repairs computers in the basement of his personal residence. Most of his business comes from friends and referrals from former customers, although occasionally he runs an ad in the local suburbia newspaper. Typically, the computers are dropped off at Rocky’s house and later picked up by the owner when notified that the repairs have been made.

The floor space of Rocky’s residence is 2,500 square feet, and he estimates that 20% of this is devoted exclusively to the repair business (i.e., 500 square feet).

His net income before a home office deduction is $8,000.

Expenses relating to the residence are as follows:

Real property taxes	$4,500
Interest on home mortgage	8,000
Total expenses of residence (utilities, repairs, etc.)	3,000
Actual depreciation for the home office only (already pro-rated based on his square feet used)	1,000

What is Rocky's net income from the repair business if:

A. He uses the regular (actual expense) method of computing the deduction for his office in the home?

B. If he uses the simplified (safe harbor) method of computing his home office deduction?

Answer 1

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