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What Is the Deduction Limit for a Home Office?

What It Is, Who It Applies to and How to Figure Out The Amount

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Even if you have qualified to take the home office deduction on your taxes, you may not be able to deduct all of your expenses in the year they were incurred. You may be subject to a deduction limit.*

Who Is Subject to a Deduction Limit?

Not everyone who takes the home office deduction is subject to a deduction limit. Those whose gross business income is equal to or greater than their expenses are able to deduct all of their home office business expenses for the year. Those whose gross business income is less than their home office expenses will be limited in their ability to deduct certain expenses.

How Is the Home Office Deduction Limit Determined?

You begin with the gross income from your business.

You then subtract expenses you would deduct even if you didn’t have a home office (mortgage interest, real estate taxes, and casualty and theft losses), but only the percentage for your home office. For example, if you have determined that your home office takes up 10% of your home, then you can only deduct 10% of each expense.

Now you subtract expenses related to your business activity (second phone line, office supplies, depreciation on equipment). You can subtract 100% of these expenses.

This will give you your deduction limit.

Once you have determined your deduction limit, you can then deduct your other applicable business expenses (maintenance, insurance, utilities and depreciation), deducting depreciation last. Again, you can only deduct the home office percentage of these expenses, such as 10% from our above example.

If your expenses are more than your deduction limit, you are able to carry over the remaining expenses to the next tax year. Keep in mind, anything you carry over will be subject to next year’s deduction limit.

An Example of the Deduction Limit

Your Gross Business Income is $10,000.
Your total home office expenses are $12,000.
You are therefore subject to a deduction limit because your expenses are more than your income.

Gross Business Income........................................................................$10,000
Minus
Home Expenses (Real estate taxes, etc.) 10%.......................................$6,000
Minus
Business Activity Expenses (Second phone line, etc.) 100%...................$2,000
Equals
Deduction Limit......................................................................................$2,000

Your deduction limit is $2000, but you have $4000 in home office expenses that you still want to deduct. You can therefore only deduct up to the $2000 deduction limit and will have to carry over $2000 ($4000-$2000) to the next tax year.

Deduction Limit.......................................................................................$2,000
Minus
Additional Home Office Business Expenses (Utilities, etc.) 10%................$1,800
Minus
Depreciation Allowed ($2200 allowable, but can only deduct $200 this tax year because of the deduction limit)..........................................................................................$200
Equals
.....................................................................................................................$0

Depreciation Carryover to the Following Tax Year ($2200-$200)................$2000


*You should always consult the IRS or a certified accountant to decide what deductions are applicable to your specific situation.
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