I use the "actual" method and my allowable expense is 63% lower in 2021 than it was in 2020. There were no physical changes to the home office and the "total home expenses" varied only slightly. There were no carryovers expenses in 2020.
Your home office expense may be limited by the income for your business in conjunction with your other business expenses. If that is the case, then you may have some carryover expenses to 2022 since you are using the actual expense method.
Take a look at the following information for some examples that may help explain your situation.
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.
Your home office expense may be limited by the income for your business in conjunction with your other business expenses. If that is the case, then you may have some carryover expenses to 2022 since you are using the actual expense method.
Take a look at the following information for some examples that may help explain your situation.
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.