One of the more popular business expenses for home-based businesses is the home office deduction. The IRS code states that the space used for the home office must be used exclusively and regularly for the operation of the business.
No other activity can be conducted in the home office to qualify for the tax deduction. If the taxpayer uses the room for any other purpose (such as a guest bedroom or place for students to prepare their homework) then the home office deduction is not allowed.
Some expenses are deductible whether or not a taxpayer uses his or her home for business. Others are deductible only if the home is used for business.
Expenses that benefit only the area exclusively used for business, such as painting or repairs in the home office, are direct expenses that are fully deductible.
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.
Expenses for the part of the home not used for business, such as lawn care or painting a room not used for business, are unrelated expenses that are not deductible.
The basic local telephone service for the first telephone line is nondeductible even if it is used for business. Any additional charges for long distance or a second line into the home used for business are deductible. Any deductible telephone costs are not included as business use of home cost.
A qualified home office is considered nonresidential real property depreciable over 39 years. For home office depreciation, the basis in the home is the smaller of:
The fair market value (FMV) of the home minus the FMV of land on the date the home was first used for business, or
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.
Permanent improvements prior to using the home for business are added to the basis of the home and depreciated as part of the adjusted basis of the home. The cost of improvements 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 2000. She first used her home for business in 2004. She also replaced her furnace in 2017. The cost of the new roof from 2000 is added to the basis of her home, and the business portion is depreciated starting in 2004. The business portion of the cost of the furnace is depreciated as a separate asset starting in 2017.
DEDUCTIBLE ONLY IF FOR BUSINESS