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Deductible Expenses for Your Home Office

The difference between direct and indirect office expenses

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There are two types of deductible home office expenses: direct and indirect expenses. Direct home office expenses relate to the actual work space, so this includes repairs and paint inside your home office. Indirect home office expenses relate to the house that the office is inside and are only partially deductible. Utilities and mortgage interest are examples of indirect expenses. For more on how to take these deductions see Home Office Deduction FAQ.

Below are both direct and indirect home office expenses that can be deducted:

Repairs (direct and indirect) - Repairs that are inside your home office are direct expenses and are fully deductible.

For an example, if you paint the walls of your office, the cost of the paint is a direct expense. However, you may not deduct for the cost of your own labor. If you pay someone to paint, you may also deduct their labor as a direct expense.

A repair to your furnace would be in indirect expense. Though your furnace heats your home office, only the percent for business use is deductible.

Some repairs, like replacing the roof, could be considered improvements to your home, in which case you can't deduct them here. But you can recapture by adding them to adjusted basis of your home, which you use to calculate your deductible depreciation. See more on depreciation below.

Real estate property taxes (indirect) - Be careful not to deduct this twice. If you deduct a portion of your property taxes as part of your home office deduction, you must reduce the real estate taxes listed on your Schedule A by that amount.

Mortgage interest (indirect) - Same is true of mortgage interest. Do not deduct it twice. Deduct on Schedule A only the amount not already deducted on Form 8829. Mortgage insurance premiums may also be deducted depending on your income.

Rent (indirect) - Multiply your rent payments the percentage of business use of your home.

Utilities (indirect) - Multiply the cost of electricity, gas, trash removal and cleaning services by your percentage of business use. Telephone is not included in this. The first telephone line to you house is considered for personal use and is not deductible at all. But a second line used exclusively for business is deductible but should not be included on Schedule C.

Homeowners or Renters Insurance (indirect) - Be sure that you only deduct the portion this that is for the tax year that your are filing. Often premiums are paid on a yearly basis, so they might cover other years.

Depreciation (indirect) - If you own your home, you can take a deduction for depreciation of the part of your home used for business. Depreciation is an allowance for the wear and tear on your home, so you cannot depreciate the value of the land.

Depreciation is calculated by multiplying the adjusted basis of your home (its cost plus any permanent improvements) or the fair market value of your home when you began using it for business, whichever is less, by the percentage of business use and then by another percentage supplied by the IRS.

Taking a deduction for depreciation can have tax consequences when you sell your home later, so be sure to carefully consider whether a home office deduction is right for you. Depreciation is a complicated deduction with many special rules, so see IRS Publication 587 or consult a tax specialist for more information.

     

    Disclaimer
    I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.

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