Question
My tax preparer told me that if I don’t have any business income, I can’t have a home-office deduction. True or false?
Answer
First, this is bad advice, as you will see.
Let’s examine what your tax preparer is telling you. He says that you will not receive any tax benefit from your home office because you have no income. That’s wrong.
On the surface it appears true, but it’s not, as we explain.
Your Situation
You state that you don’t have business income.
This could mean that you started your business late in the year and that you have expenses but have not yet received any income. In this case, you have tax deductions that you can claim and likely a tax loss that you can carry forward.
Or perhaps you have a continuing business that simply had a bad year, and your expenses are more than your income. Again, you would have a tax loss that you can carry forward.
Bad Advice No. 1
If you have a tax loss from your business and you are told not to file a tax return, that’s bad advice, because that tax loss can produce future benefits. Under current tax law, you may carry forward a tax loss to reduce future taxes.
The official name for the loss that you can carry forward is the net operating loss (NOL). As a business taxpayer, you should think of the NOL as a tax deduction savings account for future years because you can carry this loss forward until it’s used.
Planning tip 1. Always claim all your tax deductions, even when you have a tax loss.
Planning tip 2. Always file a tax return even if it shows a loss, so the IRS knows about your loss and you have the loss documented.
Bad Advice No. 2
The advice not to claim the home office because you are not going to get a deduction from the home office is wrong on two counts:
First, failing to claim the home office as your principal place of business means you are losing deductions because you have commuting mileage (i.e., ugly, personal, non-deductible mileage from both home-to-office commuting and first-and-last-business-stop commuting).
Second, failing to claim the home office because it gives you no current-year benefit robs you of the home-office deduction carryovers to future years.
Below, we’ll examine the (a) loss of business miles and (b) loss of the carryover benefit.
Loss of Business Miles
Without a home office as your principal place of business, you have personal mileage on your trips from your home to your first business stop, and from your last business stop to your home.
Example 1. You do not claim a home office, and you drive 22 miles roundtrip to see a client. The 22 miles are personal miles.
Example 2. You do not claim a home office, and you drive 18 miles roundtrip to your downtown office. The 18 miles are personal miles.
Turning the Miles into Business Miles
When you have an office in your home that rises to the level of a principal office, you treat the miles in examples 1 and 2 as business trips.4 In other words, you have no commuting mileage.
But to make this happen, you need to claim the office in your home as your principal place of business, which is easy to do as we explain in When the Second Office in the Home Is a Principal Place of Businnes.
Loss of Carryover
If you have no current-year Schedule C income, you have no current-year tax benefit from the home office, but the deductions disallowed this year carry over to next year.
The same would be true if you operate as a corporation
If you don’t claim the home-office deduction, you have no expenses to carry over.
Qualifying for the Carryover
To qualify for the home-office deductions carryover when you have no income, you need to claim the home office.
You also need to file a tax return because you want to qualify not only the home-office deductions for carryover, but also all your other business deductions as possible NOL carryovers.
Takeaways
Deduct the office in your home as your principal place of business.
When you (a) have no business or taxable income for the year and (b) claim your office in the home as your principal place of business, you gain three tax benefits:
- Your Schedule C–denied home-office deductions that produced no tax benefits this year carry over to next year, where they offset your business (The same is true if you operate as a corporation and the corporation reimburses you for the home office.)
- You no longer commute from your home to business Instead, all such trips produce business mileage.
- Any business loss apart from the home office can create an NOL that you can apply against next year’s taxes.
