Expenses not deducted last year

wrote

Those you listed are capital expenditures, and should have been booked last year and depreciation started then. You would still have some depreciation expenses to take in 2008 and going forward.

Regular depreciation is mandatory, not affected by how low your income was, and can create a loss.

Interesting.

For cash basis taxpayers, you report income in the year you collect it, and take deductions for expenses actually paid in that year.

You are prohibited from deducting in 2007 "Expenses not deducted last year". Exceptions apply for depreciation or amortization on capital expenditures.

Pretty much, yes.

There will be depreciation deductions though on your capital items, your computer, printer and other furniture, fixtures and equipment.

For expenses that properly belong in the prior year, you'll have to amend that year's return.

In addition to Paul's excellent post, the form you need is 4562 (depreciation), not 8829 (business use of your home). Use 8829 to deduct the business part of your mortgage, rent, condo fees, utilities, and so on, and also depreciation of the business part of your home. Be aware that if you take depreciation on your home on form 8829 then you have to pay a 25% tax on the depreciation when you sell your home, and if your income is low that enough that you're in the 15% tax bracket, then it's a net loss to take depreciation on your home. And if your net income in your amended return turns out to be negative, you can carryover the loss to previous years or future years.

Some items on form 8829 do carry forward, but to properly claim any expense carried forward, one has to file the 8829 for the year the expense was originally incurred. Your tax preparer at H&R Block was correct in that you may not have a 2006 deduction, but the form should have been completed sot hat the carryforward could be listed. That does require an amended return.

Sale of home: Note that the depreciation recapture is on the amount actually allowed (or allowable) in prior years since May 8, 1997, and that IRC 280A serves to disallow amounts that would otherwise cause a loss. However, in the year of sale, the net profit/loss must be computed BEFORE one reaches form 8829 (in order to appear on line 8), so depreciation carried into the year of sale isn't recaptured (nor recapturable) but is allowed (subject to the limitation on losses) in the year of sale, especially if the gain on sale is less than the accumulated depreciation carried forward at tier 3. This is quite different than the treatment for passive losses because the taxpayer gets his full loss upon disposition of the activity; not so with business use of home.

Business use of home generally does not generate an NOL. Tier 1 expenses (those otherwise allowable as itemized deductions) can, but depreciation as tier 3 CANNOT, nor can tier 2 expenses. Therefore, depreciation will never cause a carryback.

Note also that because of the forced carry-forward, it's possible to take a depreciation deduction for an asset not owned at the time of the deduction! Additionally, just because a taxpayer stops using his home for business does not mean that the carried-forward amounts disappear. They continue to carry until they can be offset or the taxpayer dies. This also means that once a taxpayer has a 280A carryforward, he will continue to file form 8829 until the carryforward is fully offset by business income (including the sale of the home).

I'm having difficulty with the above, but see my example below.

Thanks for the pointers. Form 8829 looks simple but is surprisingly confusing, and I worked out a scenario.

Here's my scnenario: 10k receipts, 5k cost of goods, 4k business operating expenses, so tenative profit is 1k. Business use of home is

1100 (mortgage etc), 600 (repairs etc), 700 (depreciation), for total of 2400. Only 1100 is allowed, and 1300 is carried over to next year.

Details ==>

Schedule C.Line1 = 10000 (gross receipts) Schedule C.Line4 = 5000 (cost of goods) Schedule C.Line7 = 5000 (gross income) Schedule C.Line28 = 4000 (total expenses) Schedule C.Line29 = 1000 (tentative profit)

Form 8829.Line8 = 1000 (tentative profit) Form 8829.Line14 = 1100 (expenses that would normally go on Schedule A) Form 8829.Line15 = max(0,Line8-Line14) = 0 Form 8829.Line25 = 600 (business expenses on home but not depreciation) Form 8829.Line26 = min(Line15,Line25) = 0 (allowable operating expenses) Form 8829.Line27 = Line15 - Line26 = 0 (limit on excess casualty losses and depreciation) Form 8829.Line29,31 = 700 (depreciation from part III) Form 8829.Line32 = min(Line27,Line31) = 0 (allowable excess casualty losses + depreciation) Form 8829.Line33 = Line14 + Line26 + Line32 = 1100 (allowable expenses

• casualty loss portion) Form 8829.Line35 = Line33 - Line34 = 1100 (allowable expenses)

So the tier 1 expenses (Line14) have generated an NOL. If Line8 was

800 then Line35 would have been 1000, and the tier 2 and 3 expenses don't generated a loss.

Form 8829.Line42 = Line25 - Line26 = 600 (carryover of operating expenses) Form 8829.Line43 = Line31 - Line32 = 700 (carryover of depreciation)

Schedule C.Line30 = Form 8829.Line35 = 1100 Schedule C.Line31 = -100

Question ==>

There is a depreciation carryforward of $700.

When the taxpayer sells their home, and suppose for my scenario that their capital gain is 0 because the home office is part of their main home and the 250k exclusion, then do they have to pay 25% of $700? Where do they get to deduct the $700?

What is the taxpayer stops using his home for business at some point? Maybe they move into a retail office, or something. What happens to the carryforwards (lines 42 and 43 of form 8829)?

Correct. $1,100 deducted in current year for a net loss on Schedule C of $. Carryforward of $600 of tier 2 expenses (indirect operating expenses). Carryforward of $700 of tier 3 expenses (depreciation).

No, because there's been no deduction of the $700 in a prior year, so there's nothing to recapture.

In your example, they haven't been able to deduct it yet. It's still carried forward. The sale generated insufficient income to offset it. Depreciation, to be recognized for recapture purposes, must have been allowed or allowable. In this case, it has neither been allowed nor was it allowable as a prior year deduction. This treatment is different than that for passive activities - where one first books and realizes the loss and carries it forward; with business use of home, the loss isn't (ignoring tier

1 expenses) isn't even booked.

They continue as they are - no increase or decrease, year after year until they can be used or the taxpayer dies. This requires a continuous filing of form 8829 - which also forces form 1040 (i.e. 1040A or 1040EZ not available). Any future business use of home that can offset it need not even be the same business as the one the taxpayer engaged in before he stopped using his home.