When it comes to the writing off a home office there is a major factor that taxpayers need to adhere to: The space must be used exclusively for business purposes and as a principal and regular place of business to meet with customers, clients, or patients.
But like with all things regarding the tax code, it gets a lot more detailed. After all, you must comply with IRS regulations as outlined in Publication 587 (available at www.irs.gov) or you could easily find your deduction being questioned and possibly partially or fully disallowed.
If you are audited and are taking a home office deduction, the auditor may want to see the home office. He will measure the space and check to make sure there is no apparent personal use of the space. You may avoid a home office visit by providing video of the space, including a video of someone taking the measurements. It’s worked before in audit, but not always.
The home office deduction is taken on IRS form 8829. At the top of the form, you will indicate the total square footage of your office followed by the total square footage of your home. Be sure to include storage areas and work station areas, as well as the office administrative area. If the total square footage of your home is 1,000 and the square footage of the home office is 100 then you can deduct 10% of the following allowable costs:
1) Mortgage interest or rent
2) Property taxes
3) Homeowner’s or renter’s insurance
4) Utilities – gas and electric, water, garbage disposal, propane
5) Cleaning expenses such as housekeeper, carpet cleaner, etc
6) General household repairs
7) Telephone, if not a dedicated business line. If the only phone line is the home phone, the IRS will allow the home office percentage against the total phone bill
8) Depreciation of the home office and all major capital improvements that affect the home office (e.g. new roof, hot water heater).
Note that capital improvements and repairs may be 100% deductible under certain circumstances. For example, say you install a wall of shelving in the home office. Because the shelving is specific to the home office and not the remainder of the house, it is 100% deductible and should be listed on Form 8829 in Column A, Direct Expenses or on Schedule C.
However, if you repair a roof leak or replace the roof completely, the entire house is benefited and the 10% allocation applies. The expense would then be listed in Column B, Indirect Expenses.
Don’t forget to expense or depreciate the contents of your home office. If you dragged in that old desk you used in college or a bookcase from the living room and a filing cabinet that you’ve had for years, you can deduct the lower of the cost or the fair market value of these items. You probably don’t have receipts to fall back on, so take pictures for storage in your tax file in the event of an audit.
If we’re talking high-end furnishings, get an appraisal and take it to your tax pro to ensure these furnishings make it onto your depreciation schedule. You can’t take section 179 expense deduction for previously personal use items; they will be depreciated over a seven year period for furniture and fixtures and over five years for equipment and machinery.
Now that you know how it works, kick off your shoes, put your feet up on the desk and enjoy your home office, where every day is casual Friday!
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.