It is likely that the
income attributable to your home office and the other business expenses are
limiting your home office expenses.
If the home office expenses are limited and not allowed to
be taken on the current year’s return, then they are carried forward to the
next year as long as the actual home
office expenses were being used and not the simplified method based solely on
the square feet of the office. Since you are using the simplified method,
any expenses not allowed are lost and will not be carried forward, so disregard
the information below about being able to carry the expenses forward.
After you take a look at the information below to understand
the limitation, you might need to revisit your entry for the percent of
business income attributed to your home office.
There are some examples below that will illustrate this
limitation a little better.
Income Earned from Home Office
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.
