John is single. age 26 and has salary from his job as a sports journalist in the

Question

John is single. age 26 and has salary from his job as a sports journalist in the amount of $50000. He also has the following income and expenses related to an activity:

Income $23000

Mortgage Interest (from his home office) $8000

Property Taxes (from his home office) $2000

Depreciation $5000

Supplies and taxes $8000

Telephone $2000

a. Calculate John's AGI

b. What is the rule regarding how hobby expenses are deducted, including ordering of expenses and all limitations?

c. Apply the rule in (b) above and provide a detailed schedule of your calculation of deductible hobby expenses are calculated

Explanation / Answer

If you use your home for business purpose, you can claim a portion of interest paid on home mortgage and property taxes. The deduction allowable is proportionate to the square foot of space occupied for business activity compared to the total space. For eg., if total home space is 1500 sq feet and if one room is used for business purpose, which is 150 sq feet, then the proportion of home expenses deductible is calculated as 10% (150/1500=10%).

In this question, there is no mention about the area occupied for business purpose.

Assuming that 10% of home space is used for business, then the deduction is;

Mortgage interest $8000*10% = 800

Property taxes $2000*10% = 200

Depreciation $5000*10% = 500

Supplies & taxes = 8000 (assuming wholly incurred for business)

Telephone = 2000 (assumed that wholly incurred for business)

Total Expenses deductible = $11500 (800+200+500+8000+2000)

Net income from business = $23000-$11500 = $11500

Salary Income (annual) = $50000

Less: Standard deduction       =$   6300(std deduction allowable for singles)

Taxable income                      = $55200

In the above example; 2% of AGI is $1230 (61500*2%)

If the hobby expenses are $5000, then the deduction allowed is (5000-1230=3770)

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