Nancy is a self-employed artist who uses 10% of her residence as a studio. The s
ID: 2632100 • Letter: N
Question
Nancy is a self-employed artist who uses 10% of her residence as a studio. The studio portion is used exclusively for business and is frequented by customers on a regular basis. Nancy also uses her den as an office (10% of the total floor space of her home) to prepare bills and keep records. However, the den is also used by her children as a TV room. Nancy's income from the sale of the artwork amounts to $40,000 in the current year. She also incurs $2000 of expenses directly related to the business other than home office expenses (e.g., art supplies and selling expenses). Nancy incurs the following expenses in the current year related to her residence:
Real estate taxes 2,000
Mortgage interest 5,000
Insurance 500
Depreciation 3,500
Repairs and utilities 1,000
Total $12,000
a.) Which of the expenditures above (if any) are deductible? Are they for AGI or from AGI deductions?
b.) Would your answer to part a change if Nancy's income from painting were only $2,500 for the year? What is the amount of office-in-home deduction and the amount of the carryover (if any) of the unused deductions? (Assume Nancy is not subject to the hobby loss restrictions.)
Explanation / Answer
a.) Which of the expenditures above (if any) are deductible? Are they for AGI or from AGI deductions?
$40,000 Income.
$2000 in business expenses are deductible
10% of the $12000 in home expenses may be deducted. So $1200 can be deducted.
The business use in the den is NOT Deductible. To be deductible, the space must be used entirely for the business. Not a shared space like the den in the home.
Here Net business income would be $40000 - $2000 - $1200 = $36,800
b.) Would your answer to part a change if Nancy's income from painting were only $2,500 for the year? What is the amount of office-in-home deduction and the amount of the carryover (if any) of the unused deductions? (Assume Nancy is not subject to the hobby loss restrictions.)
Yes, If income were only $2500, then Nancy could deduct the $2000 in business related expenses and $500 of the $1200 in home office expenses for the year. This would give her a net business income of 0.
She also would carry over $700 in unused home office deductions for future years. $1200 - $500 = $700 carry over loss for future years.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.