Qualifying for Deduction
To take a business deduction for home office expenses, you must use your home under one of the following scenarios.
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You have an area in your home that is regularly and ex-clusively used as your principal place of business.
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You have an area in your home where you regularly and exclusively meet with patients, clients, or customers.
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You have a separate structure, not attached to your home, which is used in connection with your trade or business.
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You have an area in your home used on a regular basis for the storage of inventory or product samples.
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Your home is used as a daycare facility.
Business Use of Home Expenses
Some expenses are deductible whether or not you use your home for business. Others are deductible only if the home is used for business.
| Deductible Regardless* | Deductible Only If for Business** |
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* Deductible as an itemized deduction, subject to limitation.
** Deductible as a business expense pro-rated for the amount of the business use of the home
Direct Expenses
Expenses that benefit only the area exclusively used for busi-ness, such as painting or repairs in the home office, are direct expenses that are fully deductible.
Indirect Expenses
Expenses for keeping up and running the entire home, such as insurance, utilities, and general repairs, are indirect expenses that are deductible based on the percentage of the home used for business.
Unrelated Expenses
Expenses for the part of the home not used for business, such as painting a room not used for business, are unrelated expenses that are not deductible.
Telephone
The basic local telephone service for the first telephone line is nondeductible even if it is used for business. Any addi-tional charges for long distance or a second line into the home used for business are deductible.
Depreciation
A qualified home office is considered nonresidential real property depreciable over 39 years. For home office depre-ciation, the basis in the home is the smaller of:
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The fair market value (FMV) of the home minus the FMV of land on the date the home was first used for business, or
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The home’s cost plus permanent improvements minus casualty losses minus the cost of land on the date the home was first used for business.
Home Improvements
Permanent improvements prior to using the home for busi-ness are added to the basis of the home and depreciated as part of the adjusted basis of the home. The cost of improve-ments made after using the home for business that affect the area of the home used for business are depreciated separately.
Example: Rita had a new roof put on her home in 2008. She first used her home for business in 2012. She also replaced her furnace in 2023. The cost of the new roof from 2008 is added to the basis of her home, and the business portion is depreciated over 39 years, starting in 2012. The business portion of the furnace cost is depre-ciated as a separate asset over 39 years, starting in 2023.
Did You Know?
In many cases, the basement and ga-rage may be included in the total square footage of a daycare provider’s home when calculating the business-use percent-age. In addition to regularly used rooms, the business-use area can include:
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Entryways, halls, food preparation areas, and bathrooms.
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Basement with laundry or tool rooms, storage or furnace area, etc.
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Garage where business car is parked or where household tools, trash cans, or stored daycare items are kept.
Calculating Time Spent on Daycare
You should keep a log reflecting time spent conducting the daycare business, including dates and hours each person was in your care, and additional time spent organizing, pre-paring meals, and cleaning up.
Deduction Limitation
The business use of home deduction is limited to net income from the business.
Carryover of Unallowed Expenses
Deductions not allowed due to the net income limitation are carried over to the following year. They are added to current expenses from each category and subject to the de-duction limit for that year for that category.
Simplified Option for Home Office Deduction
The simplified option may be calculated as follows.
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A standard deduction is allowed of $5 per square foot of home used for business, limited to a maximum of 300 square feet.
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Allowable home-related itemized deductions such as mortgage interest and real estate taxes are claimed in full on Schedule A, instead of apportioned between the busi-ness form and Schedule A.
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No home depreciation deduction is claimed and no lat-er recapture of depreciation is required for the years the simplified method is used.
Note:
Although recordkeeping is simplified, this option does not change the criteria for who may claim a home office deduction.
Contact Us
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves sum-marizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
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Pension or IRA distributions.
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Significant change in income or deductions.
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Job change.
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Marriage.
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Attainment of age 59½ or 73.
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Sale or purchase of a business.
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Sale or purchase of a residence or other real estate.
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Retirement.
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Notice from IRS or other revenue department.
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Divorce or separation.
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Self-employment.
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Charitable contributions of property in excess of $5,000.
*This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information.