Home Business Deduction Limit - the limit on
deducting expenses for the Business Use of Your
Home! 

Deduction Limit Defined



If your gross income from from the business use of your home
equals or exceeds your total business expenses, you can deduct
all your business expenses related to the use of your home.  If your
gross income from the business use of your home is less than
your total business expenses, your deduction for the business use
of your home is limited. 

Your deduction of otherwise nondeductible expenses, such as
insurance, utilities, and depreciation (with depreciation taken last),
that are allocable to the business, is limited to the gross income from
the business use of your home minus the sum of the following:
 

The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest and real estate taxes). The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself.

Carryover of Expenses
The deductions for the expenses relating to the business use of
your home cannot exceed net income derived from the business
use.  Thus, if your business shows a loss on your tax return, a home
office business loss will not be allowed to increase that loss.  The
expenses that are disallowed because of the income limitation
may be carried forward and treated as home-based business
expenses for next year.  You have the ability to carry over business
losses 20 years and offset up to the next 20 years of earning.  You
can also carry back all business losses for two years. 

Example 1:  Dave Riekert meets the requirements for deducting
expenses for the business use of his home.  He uses 20% of his home
for business.  Dave's income from his business was $6,000.  The real
estate tax and home mortgage amount was $3,000 for his business.  He
had $2,000 in business expenses not related to the use of his home (phone,
supplies, and depreciation on equipment).  He had $800 in expenses
related to the business use of his home.  He had $1,600 in depreciation
expenses for the business use of his home. 

In 2007 his business expenses and the expenses for the business use of his
home are deducted from his gross income in the following order:
 

Gross Income from Business                                                                      $ Minus: Deductible Mortgage Interest and Real Estate Taxes Business Expenses not related to the business use of Dave's home Deduction Limit                                                                                          $ Less expenses related to the business use of Dave's home:  Maintenance, insurance, and utilities  Depreciation allowed Other expenses up to the deduction limit                                                    $ Depreciation Carryover to 2008                                                                  $

8000 4000 3000 1000 600 400 1000 1700

Although Dave had $2,100 in depreciation expenses for the business use
of his home, he may only deduct $400 of this.  The rest, $1,700 ($2,100 - $400)
must be carried over to his 2008 taxes.
 

Example2:  You have a net loss of your home based business this
year in the amount of $7,500.  If you had $25,000 of taxable income
that you paid tax on two years ago, you can use the $7,500 loss
and reduce your taxable income to $17,500.  The result is that you
will receive a REFUND due to the carryback of the loss.


No Deduction for 0 Income for the Year
If you realize no income during the year, no deduction is
allowed.  For example, if you are a writer and use an office in your
home and do not sell any of your work for the year, you cannot
claim a home office deduction.

More Than One Place of Business
If part of the gross income for your trade or business is from the business use
of part of your home and part is from a place other than your home, you must
determine the part of your gross income from the business use of your home
before you figure the deduction limit.  In making this determination, consider the
time you spend at each location, the business investment in each location, and
any other relevant facts and circumstances. 

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