You are most likely seeing the message regarding not
having a net profit for your business because of the limitation that is placed
on the income attributed to the use of the home office, even though you are
seeing income shown on line 29 of Schedule C.
The information below will explain the limitation in more
detail with some specific examples. The key is the answer to the
question about the percentage of time spent conducting business in the home
office.
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 same income limitation is applied whether you want to
claim the actual home office expense or the simplified method -- the difference
is in whether the expenses are carried forward to the next year or not.
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.
