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How to Figure Your Home Office Deduction
How much you can deduct of your residential expenses as home office expense is contingent upon the portion of your home used in the business. There are two common methods allowed by the Internal Revenue Service of deriving the percentage of home usage devoted to the business:
There are two kinds of home office expenses: direct and indirect. Direct expenses are those only for the business part of your home and, consequently, are deductible in full. Examples include painting or repairs only in the area used for business. Indirect expenses are those for keeping up and running your entire home, and are deductible based on the percentage of your home used for business. Examples include insurance, utilities, depreciation, and general repairs. Included in these indirect expenses are certain expenses that are deductible whether or not you use your home for business: real estate taxes, mortgage interest, mortgage insurance premiums, and casualty losses are normally deductible on Schedule A of Form 1040; nevertheless, the business portion of these certain expenses still are reported under home office expenses, with the non-business portion reportable on Schedule A. If your gross income from the business use of your home is less than your total business expenses, your deduction for those indirect expenses deductible only from the business use of your home (such as insurance, utilities, and depreciation, with depreciation taken last) is limited to the gross business income minus the sum of the following:
Depreciation expense is calculated on the lower of the adjusted basis of the house or its fair market value on the date you began using your home for business. Adjusted basis includes the purchase cost of your home, less the portion allocable to the land, plus the cost of any improvements you made to it. The lower of adjusted basis or fair market value is depreciated over 39 years using the straight-line method and mid-month convention of depreciation. Consequently, the annual depreciation rate for business use of a home would be 2.564% for years 2 through 39, with the first year's rate being the prorated amount for the number of full months, plus a half for any partial month, the home was used for business in the initial year; for the final year, year 40, simply depreciate the remaining undepreciated basis. Below is a table providing the appropriate depreciation rate for the first year's business use of home according to the month in which the initial usage occurs:
Any improvements to the home (for example, new roof, vinyl siding, addition, etc.) would be capitalized and depreciated straight line over 39 years from the date of its completion. For property bought for business use, you may either elect a section 179 deduction for its full cost (up to $250,000 for year 2009) or depreciate the full cost of the property. If you decide to depreciate rathan than write off the cost of any personal property purchased for your business, it is typically depreciated over 5 or 7 years using the double-declining balance method and half-year convention. 5-year property includes computers, printers, copiers, calculators, typewriters. 7-year property includes office furniture and fixtures such as desks, chairs, tables, files. Under the double-declining balance method, the depreciation rate utilized would be twice that of the straight-line rate, except for the first year, which because of the half-year convention would equate it to a straight-line rate; in the final year any depreciable basis would be written off. If personal property is converted to business use, you can depreciate the lower of its adjusted basis or fair market value as of the date of conversion; however, you are not entitled to a section 179 deduction of its basis. If you are self-employed and file Schedule C, you would complete and attach Form 8829 to your 1040 return to deduct expenses for the business use of your home. If you are a partner who paid unreimbursed ordinary and necessary expenses (including qualified expenses for the business use of your home) on behalf of the partnership as required under the partnership agreement, you would deduct those expenses on Schedule E of Form 1040. If you are an employee who incurred unreimbursed business expenses, you would report them on Form 2106 (or Form 2106-EZ, if applicable) if you claim any job-related vehicle, travel, transportation, meal, or entertainment expenses, or if your employer paid you for any of your job expenses reportable; otherwise, you would enter your total expenses directly on Schedule A, line 21. Only those employee business expenses exceeding 2% of your adjusted gross income are ultimately deducted on tax returns of employees entitled to deductions of home office expenses. To determine whether or not you qualify to deduct home office expenses, please read the companion article to this one: Do You Qualify for a Home Office Deduction? Have a tax or an accounting question? Please feel free to submit it to William Brighenti, Certified Public Accountant, Hartford CPA Accountants. For information and assistance on any tax and accounting issue, please visit our website: Accountants CPA Hartford. If and only to the extent that this publication contains contributions from tax professionals who are subject to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, the publisher, on behalf of those contributors, hereby states that any U.S. federal tax advice that is contained in such contributions was not intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. The above tax advice was written to support the promotion or marketing of the accounting practice of the publisher and any transaction described herein. The taxpayer recipients of this offering memorandum should seek tax advice based on their particular circumstances from an independent tax advisor. |
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