Business use of home

[gregcg]

If 10% of one's business is attributable to the business office portion of your rent, then why must that 10% amount exceed ALL the expenses that the business has incurred...especially when most all of those expenses are automobile mileage??

I am doing a tax return for a friend who pays $7200 per year for rent in a private residence.  25% of his rent, or$1800,  is for space dedicated to his business.  10% of his gross income, or$4800, is attributable to activities performed in that home office.

Now, logic would dictate that the $1800 business rent portion would be deductible, if for no other reason because the income far exceeds the rent.  However, for some unexplained reason, the Form 8829 Worksheet states that the income must exceed ALL of the nearly $25,000  business expenses even though most all of that amount is unrelated to the home office.  In fact, he would have had to gross over $267,000 to yield $26,700 from the home to cover the business expenses plus his business portion rent. Instead, the  $1800 business rent portion becomes a carry over that will most likely never be used. How does that make sense?

[AmyC]

Home office expenses are limited by the net income. A business that does not have a profit can't deduct a home office.

See For National Small Business Week, plan now to take advantage of tax benefits for 2022; enhanced dedu...

You will also want to verify that only 10% of the income is attributable to the office space based on the new enhanced rules.

[gregcg]

I do understand that a home office rent is not deductible in the case of a loss.  My client did not have a loss however.

His gross income for his business, and the instructions do specifically say gross income, was around 48K.

10% of his revenue was attributable to the home office, the other 90% was due to on-site product   demonstrations.  Those demonstrations actually represented an even higher proportion of the total expenses.

My issue with the guidelines is that the portion of income attributable to the home office must exceed the entirety of expenses for his business.  That is a glaring disconnect to me. I could understand how the home office income should exceed the expenses related to the home office, but why must they exceed the entirety of the business expenses.

[AnnetteB6]

The only answer to your question is because that is the way the laws regarding home office expenses have been written.  

If there is not enough income attributable to the home office versus other business locations, then the home office expense is either limited or eliminated.  The only factor within the taxpayer's control here is to determine whether the home office was used more or less with regard to the income earned from the business.  

Take a look at the examples from the TurboTax help content for further details about how this limitation is applied:

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.

@gregcg 

[gregcg]

Thank you for the clarification.  Your explanation exactly matched scenarios I used to determine the high income production that would be required to deduct the home office rent. I just wanted to make sure that I had correctly concluded that a home office rent could be deducted only if it directly generated sufficient income to exceed all the expenses of the business

Rent on an external office location that serves only as an entry and exit for the sales staff  to identify prospects are deductible.

Travel expenses that are not covered by the sales generated from the travel are deductible.

[gregcg]

General question for anyone (can't seem to find the Post a Question) icon. If you file by mail and owe, can you include banking info for payment or must you send a check.

[TeresaM]

No, I'm afraid there is not an autodebit option in a file by mail but you can pay the IRS directly from your bank account, your Debit or Credit Card, or even with digital wallet (PayPal).

You’ll need to confirm your identity before making a payment using pay now options. Make a payment immediately, or schedule a payment, without signing up for an IRS Online Account. However, an IRS online account is a great way to check information and you may wish to create one while you are there.  

When you pay, be sure to select to which year it should be applied and that is it for a tax return, not an estimated tax payment. That way it will be credited to in the right place. 

Click here for the IRS payment website.