The software reduces the RE taxes and Mortgage interest on Sch. CA by the amount disallowed (due to the loss on Sch. C). I had assumed that it would optimize as it is a better tax benefit to increase itemized deductions than take a non-deductible home office.

So I learned that it doesn't optimize. Also learned that her failing business (book sales) likely won't be profitable in the future and so the disallowed home office deductions won't ever provide a tax benefit.