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.
Most of the time, your income from the home office (your W-2) far exceeds the home office deduction and is, in a sense, irrelevant.
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)
Note: The home office, as all other Miscellaneous employee expenses, such as mileage, computer purchase, etc., are subject to a 2 percent floor. This means that
only those amounts that are greater than 2 percent of your adjusted gross
income can be deducted. For example, if your adjusted gross income is $100,000
and your total miscellaneous deductions are $4,500, you can deduct only $2,500
-- 2 percent of $100,000 is $2,000, and the amount over that is deductible.
