Your home office deduction may be limited based on the income and expenses of your business, especially if you are using the Simplified Method to calculate your deduction. See the following information to learn more about the Simplified Method and how it works.
First, please take a look at your entries in the Home Office section of your return and verify that you have entered a number on the screen titled Business conducted in home office. It is asking for the percentage of time you spend conducting business in your home office. If this field is left blank, then the program assumes that no business is conducted in the home office and the deduction is disallowed.
If the number entered on that page is less than 100%, then the calculation could take your profit to a negative number when using the simplified home office calculation. If this happens, then the deduction is disallowed.
For any home office deduction (actual expenses or simplified), the home office deduction is not allowed to take a Schedule C bottom line from a positive profit to a loss. Therefore, before the home office deduction is calculated, the tentative profit or loss of the business is considered. If the number is a loss, then no simplified home office deduction is allowed. However, even with a loss, an actual expense home office deduction can be calculated and carried over to the next year. Carryover is only possible when using the actual expenses, not the simplified method.
The profit/loss number that is used to decide whether the home office expense is allowed comes from Schedule C line 7 minus Schedule C line 28. If the result is positive, then that is the first step to get the simplified home office deduction.
However, the Business Conducted in the Home Office comes into play too. If that number is not entered, then it is assumed to be zero. Zero times the income on Schedule C line 7 minus Schedule C line 28 gives a negative number, which means no home office deduction in the current year (carryover if using actual expense method).
If the Business Conducted in the Home Office percentage is any number less than 100%, then the amount on Schedule C line 7 is adjusted by that percentage before the expenses are subtracted. So even with what you expect to be a positive profit situation, the percentage of business conducted in the home office can drop the income to a level where the profit is negative instead of positive. This means that the simplified home office method is not allowed. Again, using the actual expense method can work, but the home office expense is carried over to a future year.
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