Rita owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home (500 square feet) where she meets with clients, prepares bills, and performs other than home office expenses, a total of $5,600. The following home-related office under the actual expense method for calculating home office expenses other work-related tasks. Her business expenses, expenses have been allocated to her home

Real property taxes $ 1,600

Interest on home mortgage $ 5,100

Operating expenses of home $800

Depreciation $1,600

Also, assume that not counting the sole proprietorship, Rita's AGl is $60,000

Assume Rita's consulting business generated $13,000 in gross income for the current year Further, assume actual expense method for computing her home office expense deduction.

a) $7,400

b) $60,000

Explanation:

First, we need to complete the question

a) What is Rita's home office deduction for the current year?

b) What is Rita's AGI for the year?

Solution

a) Rita's Home Office Deduction for the Current Year

Description Amount ($)

Gross Income 13,000

Subtract: Her Business Expenses (5,600)

The balance 7,400

Subtract: Expenses under 1st Tier (6,700)

(Interest 5,100 + taxes 1,600)

Balance 700

Subtract: Expenses unde 2nd Tier (700)

($800 Operating Expernses before limit)

Balance 0

Subtract: Expenses under 3rd Tier (0)

1,600 Depreciation before limit

Net income from Rita's Business 0

The Deduction allowed Rita is $7,400 a totla of the home office expenses and the home operating expenses

Note that there was no expense subtracted for the Tier 3 expenses this is because Rita's income had reduced to $0 and there was nothing to subtract from

B) What is Rita's AGI for the year?

The AGI is the Rita's reported AGI of $60,000 + $0 which is the net calculated income from her business. So her AGI remains $60,000.