Carryover In Business Income
Home mortgage interest, property taxes and casualty losses (limited to losses attributable to federally declared disasters for tax years beginning after 2017, and before 2026) are NEVER included in the carryover because they are allowed without regard to the gross income limitation (Sec 280A(b)). Therefore, the carryover consists of two elements which must be segregated for carryover purposes: (1) Other direct and prorated indirect expenses of the home office (including excess mortgage interest for self-employed taxpayers) that were not deductible because of the gross income limitation and (2) Home depreciation that was not deductible because of the gross income limitation. In subsequent years these two elements of the carryover are combined with like expenses for the subsequent year and then the gross income limitation for that year is applied. If there is any excess the carryover to the next subsequent year is determined and that process continues year to year until the carryover is used up.
Business Closes
Where a business closes with unused home office carryover, the carryover can only be used to reduce the business net profit to zero and cannot be used to create or increase a net loss from the business in any year. (S Rept No. 99-313 (PL 99-514) p. 84)) Thus any excess is lost and cannot be used against any other business.
Depreciation
The reason the carryover is divided into the two elements is because depreciation is always the last expense to be used in the computation for any year, and if not subsequently allowed before the home is sold, the depreciation that wasn’t allowed is not subject to recapture (allowed or allowable rule).
Carryover Application
The carryover can only be used for the same trade or business in the subsequent years and cannot be used against a positive income from another business.
Home Office and Sec 179 and/or Bonus Depreciation & Sec 199A Deduction If the deductions for home office are being limited, and the business expenses include Sec. 179 expenses, and those Sec 179 expenses are impacting the home office limitation, it may be appropriate to forgo or reduce the elective Sec 179 expense. That would allow a larger home office deduction. However, this approach would not allow the business to show a negative result. For a year when first-year bonus depreciation is allowed, electing out of the bonus depreciation for eligible business assets should be considered if it results in a greater home office deduction. But remember that if the bonus depreciation is claimed for any asset of a particular class of property, it must be used for all qualifying property of that class; election out cannot be done on an asset-by-asset basis.
-
To further complicate matters, starting in 2018, the Sec 199A deduction also needs to be considered when deciding whether to claim the Sec 179 deduction and/or bonus depreciation. Higher depreciation or expensing deductions will reduce net profit and taxable income and result in a smaller 199A deduction. On the other hand, a lower taxable income may avoid certain 199A phase-outs and limitations.