Reference no: EM132666722

Problem - For the last eight years, Jaynice and her family have lived in a large Victorian house in New England. In the current year, Jaynice and her husband decide to convert the home into a bed-and-breakfast. The family (including the two children and the dog) moves into the basement, which accounts for 30 percent of the square footage of the house. The basement has two bedrooms, two baths, a den, and a small kitchen. The upper two floors of the house are used for the bed-and-breakfast, which is operated as a sole proprietorship. Jaynice hires two employees to help her run the business. Total expenses for the first year of operation are as follows:

Mortgage interest $18,000

Real estate taxes 3,000

Salaries for two employees 40,000

Groceries for breakfast and snacks 7,000

Depreciation 10,000

For breakfast, all of the family members eat the same food that is prepared for the guests. They usually also share in the homemade cookies and cakes in the evening. On Jaynice's Schedule C for the business, she deducts $78,000 of expenses for the current tax year. Discuss whether these deductions are appropriate.