I discussed the two main rules for ensuring your home office deduction passes the red flag rule in a previous column. The home office must be used exclusively and as a principal and regular place of business to meet with customers, clients or patients.
Now for some more detailed information on securing your deduction. Non-compliance with IRS regulations as outlined in Publication 587 (available at irs.gov) could easily get you into trouble. 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 look for apparent personal use of the space. Providing video of the space, including a video of someone taking the measurements, could reduce the risk of a home office visit; it's worked before in audit, but not always.
Use IRS form 8829 to take the home office deduction. You'll need to indicate the total square footage of your home followed by the total square footage of the home office in the space provided. Be sure to include storage areas and work stations 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, you can deduct 10 percent of the following allowable costs:
- Mortgage interest or rent
- Property taxes
- Homeowner' s or renter's insurance
- Utilities--gas and electric, water, garbage disposal, propane
- Cleaning expenses such as housekeeper, carpet cleaner, etc.
- 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.
- Depreciation of the home office and all major capital improvements that affect the home office
Capital improvements and repairs may be 100 percent deductible in certain cases. For example, you install a wall of shelving in the home office exclusively for your home office use. Because the shelving is specific to the home office and not the remainder of the house, this is a 100 percent deductible expense. This particular expense will be listed on your Schedule C and deducted in full, rather than listed on form 8829 where the 10 percent allocation is used. But if you repair a roof leak or replace the roof completely, that benefits the entire house, and the 10 percent allocation applies.
Don't forget to expense or depreciate the contents of your home office, either. 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. Then take the list to your tax pro to ensure these furnishings make it onto your depreciation schedule. A section 179 expense deduction may apply for what were previously personal-use items; these items will be depreciated over a seven-year period.
Your computer and other equipment, such as copiers, faxes, scanners and printers used in the home office are not subject to the percentage allocation. If they are used 100 percent for business, they are 100 percent deductible.
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 the founder of Taxpertise located in Sonoma, CA, a firm providing bookkeeping, payroll services, QuickBooks Training, income tax preparation, and tax problem resolution including audits, offers in compromise and other representation issues. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know (Entrepreneur Press, 2009).