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 net income from the sale of the artwork (other than her home office expenses) amounts to $40,000 in the current year. She also incurs $1,400 of expenses directly related to the office (e.g., painting of the office, window blinds). 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 net income from painting were only $2,500 for the year? What is the amount of the office-in-home deduction and the amount of the carryover (if any) of the unused deductions? (Assume that Nancy is not subject to the hobby loss restrictions.)