There are many expenses available to deduct on your taxes under the home office deduction. Because some expenses are considered direct and others indirect, each home office expense must be deducted differently. Learn what category each expense falls into and the proper way to deduct it.*See Also: What Home Office Expenses Can You Deduct?
What Home Office Expense Deductions Can All Homeowners Take?
The following expenses are deductible for all homeowners, however, if you are eligible to take the home office deduction, you can only deduct the portion of the expense that is used for your home office. These deductions are considered indirect expenses, except for the casualty and theft loss noted below. (See: Basics of the Home Office Deduction to learn how to figure out the percentage of your home that your office takes up)
For example, if your home office takes up 10% of your home, then you are eligible to deduct 10% of the following expenses on your home office deduction.
- Real estate taxes
- Mortgage interest- the amount you can deduct is limited if your mortgage or home equity loan is over a certain dollar amount.
- Mortgage insurance premiums- the amount you can deduct may be limited if your gross income is over a certain dollar amount.
- Casualty and theft losses- these can be direct or indirect depending on the part of your home that was damaged. If the damage is only in your home office, you can deduct the entire expense (direct). If the damage is in both the business and personal part of your home, you may only deduct the home office percentage (indirect).
What Additional Deductions Can Those Eligible for the Home Office Deduction Take?
The following expenses are only deductible if you are eligible to take the home office deduction. The amount of deduction you can take is subject to the home office deduction limit. These expenses are considered indirect and must be multiplied by the business percent of your home to obtain the portion you can deduct.
- Depreciation- You can take a depreciation deduction for your home** and for improvements made after you established your home office. However, to be able to depreciate an improvement, it would have to affect the home office. For example, a new roof, which covers the entire home, would be a depreciable home office improvement.
To depreciate the cost of your home, you first have to determine your depreciable basis. This is done by multiplying the smaller of the adjusted basis of, your home or the fair market value of your home on the date you began using your home office, by your home office business percentage.For example:
You began using your home office on May 23.
The adjusted basis of your home on May 23 was $340,000.
The fair market value of your home on May 23 was $300,000.
Therefore, we will use the fair market value since it is the smaller of the two.
Your home office percentage is 10%.
When you multiply the fair market value by your home office percentage (300,000*.10), you will get your depreciable basis of $30,000.
Once you have your depreciable basis, or the part of your home’s cost that can be depreciated this year, you will then have to use the appropriate depreciation method (straight line, accelerated, etc) to properly depreciate it over its useful life.
To depreciate an improvement, you would take the cost of the improvement and multiply it by the percent of your home that is used for business. You would then depreciate it according to its recovery period as defined by the IRS.
- Insurance- Insurance policies sometimes cover multiple years. You can only deduct the part of the policy that covers the current tax year.
- Rent- You can deduct the rent you pay for property you use in your business. You can deduct the home office percentage of your rent.
- Repairs- You can deduct the home office percentage of a repair. It is important to understand the difference between improvements and repairs, because improvements must be depreciated.
- Security system- You can deduct expenses to maintain and monitor. You can depreciate the cost of the system related to your business.
- Utilities and services- You can deduct the home office percentage of utilities and services such as electricity, gas, trash removal and cleaning services.
What About Items That Are Considered Business Assets?
- Computers or related equipment- These things may be considered listed property if they were not purchased exclusively for business use. You can only take a Section 179 deduction or an accelerated depreciation deduction if it was purchased exclusively for business use or, for listed property, if more than 50% of its use is for business. If it’s listed property that is not used 50% or more for business, you must use the alternative depreciation deduction.
In short, if you purchased a computer or related equipment exclusively for business or for use in a qualifying home office, it is not considered listed property. If it was not purchased exclusively for business, it is considered listed property.
- Property bought for business use- This includes computers, filing cabinets, safes, desks, other furniture, office supplies, calculators, copiers and other similar equipment. You decide how you want to take the deduction. You can deduct the full cost using a Section 179 deduction, you can depreciate the full cost or you can do a mixture of both- you decide how much you want to deduct and how much you want to depreciate.
- Property bought for personal use but later converted to business use- You can’t take a Section 179 deduction. You can only depreciate it using MACRS, the Modified Accelerated Cost Recovery System, or in some cases you must use ACRS, the Accelerated Cost Recovery System.
*You should always consult a certified accountant or the IRS to determine the proper tax deductions for your specific situation.
**If you deduct depreciation on your office, when you sell your home, this depreciation will be recaptured and considered a gain that you will have to pay taxes on.