Chapter 639: David Is A College Professor Who Does Some Cons

Chapter 639david Is A College Professor Who Does Some Consulting Work

David is a college professor who does some consulting work on the side. He uses 25% of his home exclusively for the consulting practice. He is single and 63 years old. His AGI (without consideration of consulting income) is $45,000. Other information follows: Income from consulting business $4,000. Consulting expenses other than home office $1,500. Total cost relating to home: Interest and taxes $6,500; Utilities $1,500; Maintenance and repairs $450; Depreciation (business part only) $1,500. Calculate David’s AGI.

Paper For Above instruction

To determine David’s Adjusted Gross Income (AGI), we start with his baseline income of $45,000 and incorporate his consulting income and expenses, as well as the relevant portion of his home office deduction. His consulting income totals $4,000, which adds directly to his gross income. Consulting expenses other than the home office amount to $1,500 and are deductible against this income.

Next, we analyze the home office deduction. Since David uses 25% of his home exclusively for his consulting practice, 25% of the associated costs are deductible as business expenses. These include mortgage interest and taxes, utilities, maintenance and repairs, and depreciation.

The total home-related costs are: interest and taxes ($6,500), utilities ($1,500), maintenance and repairs ($450), and depreciation ($1,500). Applying the 25% business use percentage, the deductible amounts are:

  • Interest and taxes: $6,500 x 25% = $1,625
  • Utilities: $1,500 x 25% = $375
  • Maintenance and repairs: $450 x 25% = $112.50
  • Depreciation: $1,500 x 25% = $375

Summing these, the total deductible home office expenses are: $1,625 + $375 + $112.50 + $375 = $2,487.50.

However, the total mortgage interest and property taxes are limited by the overall rules for home mortgage deductions. In this context, since we are calculating AGI for business purposes, the deductions are considered part of the itemized deductions and do not directly reduce AGI unless allocated to business expenses. Only the business portion of the home expenses reduces AGI directly as a business expense.

Adding the consulting income and subtracting the deductible home office expenses, the calculation for AGI is as follows:

Base AGI: $45,000

Add: Consulting income: +$4,000

Subtract: Home office deduction: -$2,487.50

And subtracting the consulting expenses (non-home office): -$1,500

Therefore, the AGI calculation is:

$45,000 + $4,000 - $1,500 - $2,487.50 = $45,012.50

Final AGI is approximately $45,013, considering rounding.

Additional Considerations

It's important to recognize that the home office deduction is subject to various limitations, including the exclusive use requirement and the limitation on the deduction to the gross income from the business (excluding expenses that are not directly attributable to the home office). Since David’s consulting income exceeds his business expenses, the deduction is fully allowable. If expenses had exceeded income, the excess would be carried over to future years.

In conclusion, David’s AGI, combining his initial income with his consulting activities and the applicable home office deductions, is approximately $45,013, demonstrating how business-related expenses for home office use can effectively reduce taxable income.

References

  • Internal Revenue Service. (2022). Publication 334: Tax Guide for Small Business. IRS.
  • Internal Revenue Service. (2022). Publication 587: Business Use of Your Home. IRS.
  • Kuo, H. (2020). Tax Planning for Small Businesses. Journal of Taxation, 132(2), 45-60.
  • Schmidt, R. (2019). Deducting Business Expenses: Home Office Rules. Tax Advisor, 50(5), 30-35.
  • O'Hare, M., & McCarty, S. (2021). Understanding Tax Deductions for Home-Based Businesses. Federal Tax Journal, 78(3), 112-125.
  • Horton, D. (2020). Small Business Tax Strategies. CCH Editors.
  • Global Tax Network. (2021). Home Office Deduction Guidelines. Global Tax Insights.
  • U.S. Department of the Treasury. (2022). Tax Regulations for Business Expenses.
  • Henderson, T. (2018). The Tax Implications of Home Office Use. Journal of Financial Planning, 31(4), 50-55.
  • IRS. (2022). Frequently Asked Questions About Home Office Deduction. IRS.gov.

Related Assignments