What Home Office Expenses Can I Deduct on my Income Taxes?

Use of your home is a deductible expense for many telecommuters.

The home office expense deduction is supposed to be one of the perks of working at home. So when you look at your home office you may see a whole room filled with equipment, furniture and shelving, that all cost you a pretty penny. And so if you qualify for a home office deduction, you are eager to deduct it all.

But when figuring a home office deduction, the IRS separates out those less permanent features from the space itself. Furniture and equipment are deducted on a Schedule C. To deduct the use of part of your home as a business expense, use IRS Form 8829.

More: Home Office Deduction FAQ

There are two types of deductible expenses relating to the use of part of your home as a home office: direct and indirect expenses. Direct expenses relate to the actual work space, so this includes repairs and paint inside your home office. Indirect expenses relate to the house that the office is inside, and are only partially deductible. Utilities and mortgage interest are examples of indirect expenses.

There are also unrelated home expenses that are not deductible at all for your home office, i.e lawn care or painting a room beside your office.

Figuring Percent of Business Use

To figure what portion of an indirect expense can be deducted, multiply the percentage of your home that is used for business by the amount of the expense. To calculate what percentage of your house is used for business, compare the size of your office to the size of your house using this formula.

Office Square Feet ÷ Total SF of home = Percentage of Business Use

Deductible Home Office Expenses

All indirect expenses must be multiplied by the percent of business use. Note that if you began using your office during the tax year, all expenses must be prorated for the time you used the home office.

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.}