Question

Brooke owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home where she meets with clients, prepares bills, and performs other work-related tasks. The home office is 300 square feet and the entire house is 4,500 square feet. Brooke incurred the following home-related expenses during the year. Unless indicated otherwise, assume Brooke uses the actual expense method to compute home office expenses.

Real property taxes	$	3,600
Interest on home mortgage		14,000
Operating expenses of home		5,000
Depreciation		12,000
Repairs to home theater room		1,000
What amount of each of these expenses is allocated to the home office? What are the total amounts of tier 1, tier 2, and tier 3 expenses, respectively, allocated to the home office? If Brooke reported $2,000 of Schedule C net income before the home office expense deduction, what is the amount of her home office expense deduction and how much of the home office expenses, if any, would she carry over to next year?

Answer 1

Ans:

Expense	Amount	Type	Allocated to home office:(6.667 of indirect (300/4500)
Real property taxes	3600	Indirect	$240
Interest on home mortgage	14,000	Indirect	$933
Operating expenses of home	5,000	Indirect	$333
Depreciation	12,000	Indirect	$800
Repairs to home theater room	1000	Unrelated	0
Total expenses	$35,600		$2,306

B)

i). Tier- 1 expense: ($240 real property + $933 interest on home mortgage)

= $1,173

ii). Tier-2 expense= (operating expenses of home)

= $333

iii). Tier-3 expense= depreciation

= $800

C). Carry over amount to next year = $306

explanation:

Particulars	Amount($)
reported income	$2000
Less: tier-1 expenses	($1,173)
Less: tier-2 expenses	(333)
Net income before depreciation	494

As the home office expense can reduce net income to $0 but not below, brooke can reduce $494 of depreciation expense and carry the remaining $306 over to next year.