If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), 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 certain expenses 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, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). These expenses are discussed in detail under Deducting Expenses.
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.
If you are self-employed, do not include in (2) above your deduction for half of your self-employment tax.
Carryover of unallowed expenses.
If your deductions are greater than the current year's limit, you can carry over the
excess to the next year. They are subject to the deduction limit for that year, whether
or not you live in the same home during that year.
Figuring the deduction limit and carryover.
If you are an employee or a partner, or you file Schedule F (Form 1040), use the
worksheet to figure your deduction limit and carryover.
If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829.
Example.
You meet the requirements for deducting expenses for the business use of your home. You
use 20% of your home for this business. In 2003, your business expenses and the expenses
for the business use of your home are deducted from your gross income in the following order.
| Gross income from business | $6,000 |
| Minus: | |
| Deductible mortgage interest and real estate taxes (20%) | 3,000 |
| Business expenses not related to the use of your home (100%) (business phone, supplies, and depreciation on equipment) | 2,000 |
| Deduction limit | $1,000 |
| Minus other expenses allocable to business use of home: | |
| Maintenance, insurance, and utilities (20%) | 800 |
| Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) | 200 |
| Other expenses up to the deduction limit | $1,000 |
| Depreciation carryover to 2004 ($1,600 - $200) (subject to deduction limit in 2004) | $1,400 |
You can deduct all of the business part of your deductible mortgage interest and real estate taxes ($3,000). You also can deduct all of your business expenses not related to the use of your home ($2,000). Additionally, you can deduct all of the business part of your expenses for maintenance, insurance, and utilities, because the total ($800) is less than the $1,000 deduction limit. Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. You can carry over the $1,400 balance and add it to your depreciation for 2004, subject to your deduction limit in 2004.
More than one place of business.
If part of the gross income from 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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If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses (pdf). |
Business Percentage
Part-Year Use
Deduction Limit
Information courtesy of the Internal Revenue Service.
