Not my office! Photo courtesy of www.morgueFile.com

Not my office! Photo courtesy of www.morgueFile.com

The general rule with home office deductions is that the deduction cannot generate a business loss. But there’s an exception to this rule.

If you own your house and pay a mortgage or property taxes, the portion of the deduction pertaining to those two items CAN result in a business loss. The portion of the deduction pertaining to utilities, insurance, depreciation, etc. CANNOT result in a business loss.

Example

Joe the Window Washer runs a sole proprietorship out of his home. The proprietorship’s net income (not including the home office deduction) is $1,000.

Based on the square footage of his office, Joe’s deduction for mortgage interest and property taxes comes to $1,500. Other expenses (utilities and depreciation) total $1,000.

The $1,500 of mortgage interest and property taxes are fully deductible, producing a business loss of $500 ($1,000 of net income minus $1,500).

The other $1,000 of home-office expenses for utilities and depreciation are not currently deductible. Instead, the deduction for those items gets carried forward to future years, where they can be taken as a business deduction if there’s enough business income.

“This blog post, along with comments that may follow, should not be considered tax advice. Before you make final tax or financial decisions, please secure a professional tax advisor to give you advice about your unique situation. To secure Jason as your accountant, please click on the ‘Services’ link at the top of the page.”