Monthly Newsletter Office in the Home

 

What is an office in the home?

When you use an area of your home exclusively as a main place of conducting business and the purpose of using the space is to generate income, you can deduct the expenses to have and maintain that area as your business office. The area doesn't have to be enclosed by walls but it should have some recognizable boundaries and used "exclusively" for business and nothing but business. You can also include storage areas of your home for supplies as additional office space.

Can you have more than one office?

Yes, but the office in your home must be the main location for meeting clients, preparing your work and conducting business. Revenue you generate must be identifiable to the office in the home location, even if it is only a portion of your gross revenues.

How do you determine the deductions?

You must first calculate the square footage of the office space. Then you must calculate the total square footage of your home. The allocation percentage is determined by dividing the office square footage by the total square footage of the home.

What types of expenses are deductible?

An allocation of personal use and office use of the following expenses is made:

Home mortgage interest

Real estate taxes

Insurance

HOA dues

Utilities & cable

Security system

Depreciation on the building

Depreciation?

Compute the actual cost from your original closing statement and any improvements. Allocate that cost between land and building, since only the building is depreciable. This is done by taking a current real estate tax assessment from your county and use their comparative amounts of building and land value to calculate a percentage to total value for building and land to apply against the actual cost. Only cost is depreciable not value. Then once you have the cost of the building, you multiply the allocation percentage for the office times that cost and this is your office portion of the building cost used for depreciation. Depreciation for home offices are normally straight line over thirty-nine years.

Other considerations?

When you sell your home the depreciation allowable during the office in the home period must be shown separately in the calculation for gain on the property and picked up as ordinary income not capital gain. Military home allowances are offsets to office expenses other than interest and taxes.

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Prepared by: Robert Reinert, CPA Indio, CA