Which home office expenses are deductions?

The home office deduction is one of the most popular deductions for self-employed taxpayers who have an office in the home. If you work from home, you may be entitled to above the line deductions for the following:

  • The “direct expenses” of the home office include depreciation deductions for equipment, furniture, and fixtures directly related or used in the home office. The costs of painting or repairing the home office is also deductible.
  • The “indirect expenses” for the maintaining the home office such as the proportionate share of costs related to deprecation, property taxes, insurance, mortgage interest, and utilities.

What do I need to qualify?

In order to qualify for the home office deduction you must meet one of the following three exceptions:

1.  Your home office must be your principal place of business. If you use your home office exclusively and on a regular basis for work, then you are entitled to this deduction. The home office is considered to be your principal place of business if you use your home for administrative and management activities or if the home office is the most important place where you conduct business.

2.  If your home office is used, exclusively and on a regular basis, for meeting patients, clients, or customers you are entitled to a home office deduction.

3.  If you home office is a separate structure that is unattached from home and it is used exclusively and on a regular basis for business, then you are entitled to a home office deduction. Unattached structures on your property include artist’s studios, workshop, office building, or a garage.

The home office deduction is limited by the income attributable to the home office. Any home offices that can’t be deducted due to these limitation s can be carried over and deducted in future years.

What happens if you sell a home that that includes a home office? If you sell a home at a profit that had a home office, then the exclusion for the gain on sale of the principal residence won’t apply to the portion of the home that you claimed deprecation for. The remainder of the home will qualify for the principal residence exclusion.

Don’t hesitate to contact us at CAPATA to help ensure the proper tax treatment for your home office.

CAPATA is a full-service accounting firm located in Laguna Niguel in southern California.

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