Basics of the Home Office Deduction Limit

Is There a Maximum Amount You Can Claim?

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Home offices are very common. If you use this office to run your business, you may be able to take certain deductions on your taxes. However, you may be subject to a limit on how much you can deduct. Here are the basics of the home office deduction limit and how your income and expenses play a role.*

Who Is Subject to a Home Office Deduction Limit?

Some individuals are able to deduct all of their expenses for their home office in a given tax year.

Other individuals will be subject to a limit on the amount that they can deduct. The IRS decides how much you can deduct by looking at the amount you make compared to how much you spend.

  • No Limit on Home Office Deductions:

You may be able to deduct all of your home office expenses for the year. Those whose gross business income is equal to or greater than their expenses are able to deduct all of their home office business expenses,

  • Limit on Home Office Deductions:

The IRS may put a limit on the home office expenses you can deduct if you meet the following criteria. Your gross business income is less than your home office expenses.

7 Steps to Determine Home Office Deduction Limit

There is a step by step process to determine how much you are able to deduct on your taxes for your home office. The following six steps can help you determine this number.

1. Determine the percentage of your home that your home office taxes up.

For example, if there are ten rooms in your home and your home office takes up one room, you may determine that your home office takes up 10% of your home.

2. Start with your business's gross income for the year.

3. You then subtract expenses you would deduct even if you didn’t have a home office. This can include mortgage interest, real estate taxes, and casualty and theft losses.

You will only subtract the percentage for your home office. So if your home office takes up 10% of your home, then you can only deduct 10% of each expense.

4. Now you subtract expenses related to your business activity from your business's gross income. This can include a second phone line, office supplies and depreciation on equipment. You can subtract 100% of these expenses.

5. This will give you your deduction limit.

6. Once you have determined your deduction limit, you can then deduct any other applicable business expenses. This could include maintenance, insurance, utilities and depreciation. You need to deduct depreciation last. Again, you can only deduct the home office percentage of these expenses, such as 10% from our example above.

7. 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

The following is an example of how to use your income and expenses to determine your home office 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

Landlord and Property Investor Tax Deductions

The home office deduction is only one way landlords and property investors can save money on their taxes. Depreciation, repairs and interest on a mortgage or the interest on business credit cards are other ways you can save.

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