It says I can't claim a home office deduction because profit was zero or less, but I had a profit of $5000+. What happened?

[AnnetteB · Accepted solution]

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. 

The key data entry that affects this calculation is the “percentage of time spent conducting business in the home office” entered on the screen titled Business Conducted in Home Office.  This screen is found in the home office section of your business income and expenses. 

It could be that the combination of income attributable to your home office and the other business expenses are not allowing you to claim any home office expenses.  Take a look at the examples below, especially number 3.

There are some examples below that will illustrate this limitation a little better.  From TurboTax help content:

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.

[samiam9503]

This producing an error for me because I had two home offices over the span of one year, cut right down the middle when I moved June 30th. So, my percentages are 35% for each yet 70% of income in each six-month period was earned from home office, not 35%.

[5455]

Regs.1.280-A

[Rivellrj]

This answer helped me understand better why I saw the message that my home office deduction could not be taken. Thank you! 

[Lulu247]

Having the exact same problem. I still don't get the explanation. What does that have to do with net profit of zero when I do have profit?

[DaveF1006]

It all depends on the percentage of time spent conducting business in the home office and the combination of other business expenses that you claim in your tax return. AnnetteB explains it perfectly in her post above. As Annette states, "It could be that the combination of income attributable to your home office and the other business expenses are not allowing you to claim any home office expenses".  I will use a similar example she uses.

Suppose you have $10,000 worth of profit and 70% of your income was earned working from your home. Now, let's assume your other expenses are $5000 and your home office expense is $3000.  Form this, one would assume there is a $2000 net profit but this isn't the case.

• $10,000 X 70%= $7000 from the business use of your home.
• $7000-$5000= $2000 are the home office expenses available to be used for your home
• $2000 - $3000= $0 expenses are not available to be used for home office expense this year but will be carried over to next year.

I realize this sounds harsh but please read IRS Publication 587 and view the worksheet on page 20. Turbo Tax uses the same calculation as this worksheet uses to determine your home office deduction limitation.

@Lulu247