Home Office: Mortgage Interest (>$750k) & Real Estate Taxes (>$10k)

[Anonymous]

BACKGROUND:  I have a single member LLC and a home office that accounts for approximate 5% of my home.  My business operated at a loss last year, but I had significant W-2 income from another source.

TurboTax Home & Business seems to be incorrectly calculating my mortgage interest and real estate tax deductions on both my Schedule A - Itemized Deductions and Schedule C - Form 8829.  Both my mortgage principal (>$750k) and real estate taxes (>$10k) are above the deductible limits.  TurboTax is correctly allocating the percentage of use between my Schedule A and Schedule C, but the combined amount appears to be using the FULL amount of mortgage interest.  The Real Estate Tax issue is similar, but slightly different.

TurboTax asks for me to enter the FULL amount of Mortgage Interest paid in both the Business and Personal Deduction sections.  I entered these values as instructed and assumed the program would correctly recognize the portion in excess and only allocate the deductible portion between my Schedule C and Schedule A, but the program is allocating the full amount rather than just the deductible portion.   How do I correct this?  Also, I don't think this matters, but perhaps its the source of the bug...  My mortgage principal is only slightly above the deductible limit ($785k vs. $750k), if I allocate 5% attributable to my home office, it actually reduces the principal below $750k. 

Regarding the Real Estate Taxes, TurboTax is correctly limiting my SALT deduction to $10k on my Schedule A, but the program is using the full $11,440 of Real Estate Taxes when calculating my Home Office share on Schedule C and deducting the value as an indirect expense.  Based on my understanding, I should be able to deduct the home office's share of the full $11,440, but any amount attributable to taxes in excess of the $10k limit should be accounted for as Excess Real Estate Tax.  Am I missing something?  How do I correct this if necessary?

On final but semi-related question.  I started my business in May, so only used the home office for 8 months out of the year.  I entered this information when TurboTax asked when I started my business and how many month of the year I utilized the home office.  Nonetheless, TurboTax seems to be using the FULL YEAR amounts to calculate my business share of Mortgage Interest, Real Estate Taxes, and other Indirect Expenses (eg. insurance, utilities, etc).

These seem to be major problems with the way the program accounts for significant business and personal deductions.  I've used the program for years for my personal taxes, but these issues might prevent me from using it in the future now that I have a business.

[ColeenD3]

Enter the prorated amounts on your Schedule A and Form 8829. Double-check your entry regarding the number of months that you used the business.

[Anonymous]

Thanks for your reply.  I double checked my business and home office entries and both definitely indicate that I started the business in May 2020 and only used the home office for 8 months.  It looks like I'll need to manually adjust these entries as well (assuming my understanding of the tax law is right...)

My biggest concern here is that I'm not sure my understanding of these items is 100% correct.  Shouldn't TurboTax know how these deductions should be applied and then ensure the calculations are done correctly?  Isn't that why we use software like this in the first place?

As is currently stands I'm still confused as to what I (and the software) SHOULD be doing.  Obviously I want to claim the biggest deduction I legally can, but I'm concerned that TurboTax isn't doing these calculations correctly.   These seem like they would be very common scenarios for most small business owners, so I'm shocked the program isn't doing these things automatically.

What portion of my mortgage interest can I deduct on my schedule C?  Can I deduct the full amount of interest attributable to the home office even if the total principal is over the $750k limit, or can I only deduct the home office's portion of the reduced amount?  What portion would be an indirect expense in the current year?  What portion (if any) would be excess mortgage interest and carried forward to future years?

What portion of my Real Estate taxes can I deduct on my schedule C?  Can I deduct the full amount of real estate taxes attributable to the home office even if it is greater than the $10k SALT limitation, or can I only deduct the home office's portion of some reduced amount?  How do I calculate the reduced amount when my personal SALT deduction is limited by both state income taxes and real estate taxes?  What portion would be an indirect expense in the current year?  What portion (if any) would be excess real estate taxes and carried forward to future years?

[ColeenD3]

Yes, the SALT and mortgage limits have nothing to do with the Home Office. These are only itemized deduction limits. Prorate your deductions according to the square footage of your office contrasted to the square footage of the whole house.

It is difficult to explain why the software is behaving in a particular way for one customer. Normally, if an agent tries to duplicate the issue, there is no problem.