J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

40.15 Business Income May Limit Home Office Deductions

Even if your home business use satisfies the deduction tests (40.12), deductions for the business portion (40.14) of utilities, maintenance, and insurance costs, as well as depreciation or rent deductions, may not exceed net business income after reducing the tentative profit from Schedule C by allocable mortgage interest, real estate taxes, and casualty deductions. To make sure that deductible expenses do not exceed income, the IRS requires you to use Form 8829. If you do not realize income during the year, no deduction is allowed. For example, you are a full-time writer and use an office in your home. You do not sell any of your work this year or receive any advances or royalties. Therefore, you may not claim a home office deduction for this year. See also the rules for writers and artists earlier in this chapter (40.9).

Part II of Form 8829 limits the deduction of home office expenses to net income derived from office use. You start with the tentative profit from Schedule C. If you sold your home during the year, increase the tentative profit by any net gain (or decrease tentative profit by any net loss) that is allocable to the office area and reported on Schedule D or Form 4797. The following expenses are listed first in Part II of Form 8829 for purposes of applying the income limit: Casualty losses affecting the residence, deductible mortgage interest, and real estate taxes. If there is income remaining after these expenses ...