Home Business Deduction Limit
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:
- 1. 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).
- 2. 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.
Home business deduction limit 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 $8,000. The real estate tax and home mortgage amount was $4,000 for his business. He had $3,000 in business expenses related to the use of his home (phone, supplies, and depreciation on equipment). He had $600 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 2013 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 ||$8000|
|Deductible Mortgage Interest and Real Estate Taxes||($4,000)|
|Business Expenses related to the business use of Dave's home||($3,000)|
|Deduction Limit for year||$1,000 (a)|
|Less expenses related to the business use of Dave's home:|
|Maintenance, insurance, and utilities||($600) (b)|
|Depreciation allowed||($1,000 deduction limit (a) from above less $600 expenses (b) above)||($400) (c)|
|Other expenses up to the deduction limit||This is max that can be deducted based on calculation above (a)||$1,000|
|Depreciation Carryover to 2014||($1,600 Depreciation expenses - $400 allowed (c) for current year)||$1,200|
Although Dave had $1,600 in depreciation expenses for the business use of his home, he may only deduct $400 of this which is determined by taking the $1,000 total deduction limit for 2013 less the $600 in expenses related to the business use of his home. The remainder left is $400. The rest, $1,200 ($1,600 – $400) must be carried over to his 2014 taxes.
Home business deduction limit example 2: 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.