Even though one of your businesses had a profit, the
deductible home office expense is limited by the income for the business that
is attributed to the home office and by the other expenses for the business. 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.
There are some examples below that will illustrate this
limitation a little better. Take a close
look at example 3 if none of your home office expenses are being allowed.
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.
