According to the IRS, the amount of your home
office deduction is limited to the gross income derived from qualified business
use of the home reduced by the business deductions that are not related to your
use of the home.
TurboTax will ask you how much income was
derived from the office in the home. You may have two businesses, but only one
of them uses the home office. Enter the number as a percentage (as in
"What percentage of your income comes from your home office.")
Note: This info is for home office
calculation purposes only and is not being added to your income again.
Here's how to enter it into the Office in the
Home section of your return:
·
Type “home office” in the Search box.
·
Select the “Jump to” link.
·
Select Add expenses for this work (or Edit and
navigate down to Business Expenses).
·
Scroll to Home Office Expense, click Update
·
Click through several screens (at least 12) until you see the "Business
conducted in home office" screen
·
Enter or Edit your percentage
(See the attached screenshot below. Click to
enlarge.)
Also, you didn't ask this, but if you have two separate business running out of the same home office, you'll
need to divide up the space and enter it as if you had 2 separate offices. The IRS doesn't
provide explicit direction on how to do this, stating only that the method you
choose be "reasonable."
The
most important thing to remember is that the total amount of your home office
square footage, when added together, should not exceed the total you would
claim if you had just 1 business use.
For
example, if you have 2 businesses and 1 office measuring 100 square feet that
you use equally for both businesses, you could enter 50 square feet for each
home office. Or if you use your home office more for 1 business than the other,
you could enter 75 square feet and 25 square feet, respectively.
Wondering
what a "reasonable" dividing method could be? Here are a few
examples:
-
One could be based solely on time. For example, if you use your entire office
for each of your businesses, using it 60% of the time for 1 business and 40% of
the time for another, you could divide the space 60/40.
-
Another could be based solely on space. For example, if each business requires
special equipment that takes up 50% of the office, you could divide the office
50/50.
-
A combination of the above might also work. For example, you might have special
equipment for 1 business that uses 50% of your office space. You use the other
50% for both businesses, splitting your time equally. As a result, you would
enter 75% of your home office square footage for your first business and 25%
for your second business.
Whatever
method you choose, when you start entering home office expenses, enter the full
amounts you paid during the time you used the space for either office. Do the
same on your other office.
It
might seem like you're entering everything twice, but since you divided up the
square footage earlier based on how you use it, all of the expenses for the
total square footage will be accounted for on your tax return.
TurboTax
will calculate the correct expense amounts for each office, and the total
expense amount will then be correct on your tax return.
Here's the long answer:
The IRS limits the total of certain kinds of
home office expenses - the ones you would not be able to deduct anywhere else
on your tax return, such as your utilities and repairs - to the income earned
from activities in your home office. Although these expenses cannot themselves
create a loss on your business, you can carry over any unused portion to next
year's home office deduction.
Here's how it works. Let's say
- Your business income before any
expenses was $10,000
- All business expenses that would not
limit your home office deduction were $4,000, and
- The home office expenses were $3,000
1). If 90% of your income came from business
conducted in your home office, then you can deduct all of your home office
expenses:
- $10,000 X 90% of income from the home
office = $9,000 from business use of the home
- $9,000 - $4,000 other expenses =
$5,000 available for home office expenses
- $5,000 is greater than $3,000 home
office expenses, so you can deduct all of them.
2). However, if 60% of your income came from
business conducted in your home office, then your home office expenses will be
limited:
- $10,000 X 60% of income from the home
office = $6,000 from business use of the home
- $6,000 - $4,000 other expenses =
$2,000 available for home office expenses
- $2,000 is less than $3,000 home
office expenses, so you can deduct $2,000 of them this year, and carry the
remaining $1,000 to next year.
3). In addition, if 30% of your income came
from business conducted in your home office, then you would not be able to
deduct any of them this year:
- $10,000 X 30% of income from the home
office = $3,000 from business use of the home
- $3,000 - $4,000 other expenses = $0
available for home office expenses (this will never be less than zero)
- You cannot deduct any home office
expenses this year, but you can carry the entire $3,000 to next year.
TurboTax will calculate everything for you,
and will transfer any unallowed amount to your 2017 tax return.
