Assignment Problem Six - 8 (Work Space In The Home Costs And CCA) Olin Packett has decided that he must find a way to earn additional income. While he has a reasonable salary from his current employment, it is not nearly adequate to provide for the luxury items that he feels he really should be enjoying. After consulting his know-it-all brother, he concludes that a home-based online business which provides premium quality organic nut, fruit and candy products would do well. He opens his website for business on March 1, 2019. He will operate this business out of his home. This property was acquired during 2018 at a total cost of $467,000, of which $130,000 can be attributed to the value of the land on which the house is situated. The business will have exclusive use of 23 percent of the floor space in Olin's home. Olin does not believe that the value of the property has changed significantly since its acquisition. Olin was not prepared for the immediate large orders he receives as he thought business would be slow to start. On March 15, 2019, he acquires office, shipping and storage furniture and shelving at a cost of $42,000. Later that month, on March 27, he acquires an all-in-one computer at a cost of $1,940, along with business software at a cost of $467. He also arranges to have a separate phone line installed for the use of the business. As he meets with more suppliers and clients, he purchases a tablet for $400 on June 30 to enable him to operate more efficiently outside his home. The phone package that he acquires includes the use of a toll-free number for his customers, as well as unlimited long distance calls in Canada. 298 Chapter 6 Assignment Problems For the year ending December 31, 2019, costs associated with owning his home are as follows: Utilities For Home (Heat, Light, And Water) $ 2,650 Mortgage Interest Paid 14,600 House Insurance 1,300 Property Taxes 7,005 Repairs And Maintenance For Home* 13,400 Total $38,955 *Of the repair costs, $12,200 represents the cost of replacing the aging cedar siding on the home with metal siding. The remaining $1,200 ($13,400 - $12,200) involves ordinary day to day maintenance (e.g., replacing light bulbs and furnace filters). During the period March 1, 2019 through December 31, 2019, his sales total $233,000. Costs associated with these sales are as follows: Cost Of Merchandise Purchased $116,014 Unsold Merchandise At December 31, 2019 16,327 Packaging Materials 4,206 Shipping Costs 8,354 Office Supplies 3,210 Telephone (Total Charge For The Period) 862 Advertising In Various Canadian Media 6,438 Insurance On Business Inventories 423 Cleaning Services For Office And Shipping Space 3,250 Meals And Entertainment For Suppliers 2,450 Credit Card Fees 2,300 Estimated Bad Debts 1,450 Olin's parents have been helping him by taking orders and packaging product for shipping. They refuse any payment for their work as they are both bored with the retirement life and, unlike their son, feel they have more than adequate income for their modest needs. Required: A. Can Olin deduct work space in the home costs? Briefly explain your conclusion. B. Compute the minimum net business income or loss that Olin must report in his 2019 personal income tax return. C. Briefly describe any issues that should be discussed with Olin concerning the work space in his home and business costs. 2) Assignment Problem Six - 8 (on Page 297 of the Text) NOTE 1: Part B of your solution must be in the form of a *Completed T2125 Form* A fillable version of the form is available for download on Brightspace. You must download the pdf form and open it in Adobe Acrobat first (NOT in a browser), then complete and save the pdf file. If you complete the form in your browser, you may end up with a blank file. NOTE 2: CCA calculations are provided as follows: Maximum CCA amounts on the assets of the business (not including CCA on the house) for the short fiscal year would be calculated as follows (alternative calculations shown in the two columns): Short Fiscal Year 100% (306/365) Class 8 [($42,000)(150%)(20%)] $12,600 $10,563 Class 50 [($1,940 + $400)(150%)(55%)] 1,931 1,619 Class 12 [($467)(1/2)(100%)] 234 196 Total $ 14,765 Short Fiscal Year Factor 306/365 Maximum CCA $12,378 $ 12,378 + 94.9% Assignment Problem Six - 8 (Work Space In The Home Costs And CCA) Olin Packett has decided that he must find a way to earn additional income. While he has a reasonable salary from his current employment, it is not nearly adequate to provide for the luxury items that he feels he really should be enjoying. After consulting his know-it-all brother, he concludes that a home-based online business which provides premium quality organic nut, fruit and candy products would do well. He opens his website for business on March 1, 2019. He will operate this business out of his home. This property was acquired during 2018 at a total cost of $467,000, of which $130,000 can be attributed to the value of the land on which the house is situated. The business will have exclusive use of 23 percent of the floor space in Olin's home. Olin does not believe that the value of the property has changed significantly since its acquisition. Olin was not prepared for the immediate large orders he receives as he thought business would be slow to start. On March 15, 2019, he acquires office, shipping and storage furniture and shelving at a cost of $42,000. Later that month, on March 27, he acquires an all-in-one computer at a cost of $1,940, along with business software at a cost of $467. He also arranges to have a separate phone line installed for the use of the business. As he meets with more suppliers and clients, he purchases a tablet for $400 on June 30 to enable him to operate more efficiently outside his home. The phone package that he acquires includes the use of a toll-free number for his customers, as well as unlimited long distance calls in Canada. 298 Chapter 6 Assignment Problems For the year ending December 31, 2019, costs associated with owning his home are as follows: Utilities For Home (Heat, Light, And Water) $ 2,650 Mortgage Interest Paid 14,600 House Insurance 1,300 Property Taxes 7,005 Repairs And Maintenance For Home* 13,400 Total $38,955 *Of the repair costs, $12,200 represents the cost of replacing the aging cedar siding on the home with metal siding. The remaining $1,200 ($13,400 - $12,200) involves ordinary day to day maintenance (e.g., replacing light bulbs and furnace filters). During the period March 1, 2019 through December 31, 2019, his sales total $233,000. Costs associated with these sales are as follows: Cost Of Merchandise Purchased $116,014 Unsold Merchandise At December 31, 2019 16,327 Packaging Materials 4,206 Shipping Costs 8,354 Office Supplies 3,210 Telephone (Total Charge For The Period) 862 Advertising In Various Canadian Media 6,438 Insurance On Business Inventories 423 Cleaning Services For Office And Shipping Space 3,250 Meals And Entertainment For Suppliers 2,450 Credit Card Fees 2,300 Estimated Bad Debts 1,450 Olin's parents have been helping him by taking orders and packaging product for shipping. They refuse any payment for their work as they are both bored with the retirement life and, unlike their son, feel they have more than adequate income for their modest needs. Required: A. Can Olin deduct work space in the home costs? Briefly explain your conclusion. B. Compute the minimum net business income or loss that Olin must report in his 2019 personal income tax return. C. Briefly describe any issues that should be discussed with Olin concerning the work space in his home and business costs. 2) Assignment Problem Six - 8 (on Page 297 of the Text) NOTE 1: Part B of your solution must be in the form of a *Completed T2125 Form* A fillable version of the form is available for download on Brightspace. You must download the pdf form and open it in Adobe Acrobat first (NOT in a browser), then complete and save the pdf file. If you complete the form in your browser, you may end up with a blank file. NOTE 2: CCA calculations are provided as follows: Maximum CCA amounts on the assets of the business (not including CCA on the house) for the short fiscal year would be calculated as follows (alternative calculations shown in the two columns): Short Fiscal Year 100% (306/365) Class 8 [($42,000)(150%)(20%)] $12,600 $10,563 Class 50 [($1,940 + $400)(150%)(55%)] 1,931 1,619 Class 12 [($467)(1/2)(100%)] 234 196 Total $ 14,765 Short Fiscal Year Factor 306/365 Maximum CCA $12,378 $ 12,378 + 94.9%