If you’re like me and you have the smallest of small businesses (i.e. the home office), you’re probably hoping to take a nice, juicy deduction for the portion of your rent and utilities that goes towards supporting your home office. Do you want the good news or the bad news first?
Alright, first the bad news: if the income you made working for yourself is less than your total expenses for the year, including the home office portion of your rent and utilities, you cannot take this deduction. In other words, the IRS will not let you deduct the office portion of your home if it operates at a loss. In my case, because I was teaching for most of 2007, I was an employee during those months and not working for myself. Nevertheless, I was also starting a business, so my expenses for the year were about $2,000 more than the income I made working for myself rather than for the school.
Okay, now the good news: the home office deduction rolls over from year to year until your self-employment income exceeds your expenses. That means that in 2008, assuming my business makes a tidy profit, I can deduct the rent and utilities for my home office from 2008 and 2007!
In short, if you have a home office that eventually makes some money you will get your deduction, just maybe not right away. Be careful about the size of the refund you are expecting this year, especially if you started your business in 2007 or finally took it full-time.