Limits on Home Office Business Deductions
Even if your home office and the business expenses associated with that office are otherwise deductible, your deductions may be limited, if your gross business income is less than the total amount of your business deductions. From IRS Publication 587 (2007), here is the detail for this limitation:
Your deduction of otherwise nondeductible expenses, such as insurance, utilities and depreciation (with depreciation taken last) 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, real estate taxes and casualty and theft losses);
- The business expenses that relate to the business activity in the home (for example, salaries or supplies), but not to the use of the home itself.
Here is an example of how this works:
- First, assume you have met the requirements for claiming a home office deduction (from Page 1) and you have calculated your home office percentage is 20% (from Page 2)
- Your gross business income is $10,000.
- Subtract your deductible mortgage interest percentage for the business, say $1500 ($1500 x 20% = $300). Subtract the business expenses NOT associated with the business use of your home ($4,500, for such items as advertising, travel, and fees for professional advisers).
- $10,000 - $300 -$4500 = $5200. This is the limit to which you can deduct other business expenses associated with the use of your home.
- From this limit you can deduct, first, allowable business expenses associated with the use of your home, then allowable depreciation on your home (based on your office deduction percentage).
If you cannot deduct all of your expenses and depreciation because of the limit, you may be able to carry over some or all of these expenses to the following year. Check with your tax adviser for more details on this carryover allowance.
Note that you can always deduct allowable business expenses not associated with the use of your home, and you can always deduct the business percentage of your mortgage interest. But you will be limited in your ability to deduct other home business expenses, based on your income. For example, if you have a net loss, you will not be able to deduct any home business expenses or depreciation in that year (save your calculations for your tax adviser or preparer).
A reminder: My purpose is to provide you with general information you can use in gathering documents and to help you gain an understanding of U.S. tax laws. I am not a tax attorney or tax preparer. Please consult a qualified expert when you are preparing your tax returns or making tax-related decisions.
