Calculating Home Office Expenses

How do I figure what I can deduct for my home office?

If you decide that it's worthwhile to take the home office deduction, you need to determine exactly what to deduct, and how to calculate the deduction. Follow these steps:

1. Go Through your Records.

It is very important to keep receipts for all of your expenses for your home, your home office, and your business.

Be sure to include items such as replacing the carpet in your office space, upgrading your office furniture, or purchasing new equipment. For these capital assets, you can depreciate the expenses (deducting them over a period of time) or perhaps claim a Section 179 deduction (writing them off immediately).

Your records should also include notes about:

    * Clients who come to your home.
    * Days and hours you worked at home.
    * The nature of the work done at home.
    * Repairs made to your home.

Note:

If you operate a day care center in your home, you need to record the hours you operate, and the number of weeks in the year that you are open for business.

2. Determine Your Office's Share of Home Expenses.

You get to deduct a portion of what you pay to keep your house going:

    * Insurance.
    * Maintenance.
    * Mortgage interest or rent.
    * Real estate taxes.
    * Repairs.
    * Cash removal.
    * Utility bills.

You can deduct a certain percentage of the above listed expenses, because they are associated with maintaining your home office. The percentage you can deduct is calculated by dividing the square footage of your home office by the total square footage of your house. Multiply this percentage by each expense to get the portion you can deduct.

Example

If your house is 2000 square feet, and your home office is 200 square feet, your office takes up 10% of the total area, so you can deduct 10% of your utility bills for the year.

3. Determine the Direct Expenses for Your Home Office.

Home office expenses, which relate directly to your business, can be deducted in their entirety. Such expenses might include a fax machine that you only use for business, bookshelves in your home office, or business software.

Example

If you have one phone line in your home, no tax deduction is allowed for the amount you pay for basic local service. Any additional charges for long-distance business calls from that line, however, are considered to be directly related to your business and can be deducted in full. If you have a second phone line in your house that you use regularly and exclusively for business, you can deduct all the expenses for that line as well.

4. Calculate Your Office's Share of the Depreciation on your Home.

If you own your home, you are also allowed to take a deduction for depreciation related to your home office. To calculate the depreciation deduction, you need the following information: your home’s purchase price, the cost of all improvements you’ve made to the house, and the value of the land your house sits on. To calculate the house’s depreciable tax basis, you take the purchase price, add the value of any improvements, and subtract the value of the land. You then multiply this tax basis by the home office percentage, as calculated above.
Example

You purchased your home on 3/26/01 for $517,000, $200,000 of which was for the land, and $317,000 of which was for the structure itself. Only the structure is depreciable. In your home, you use one room for an office. The room's area is 170 square feet out of a total square footage of 2,675 for your home. Therefore, your home office is 6.36% of your home's total area.

So the portion of your home's depreciable structure that is allocated to your office is 6.36% of $317,000, or $20,161. According to tables published by the IRS, the depreciation rate for the second year of a real property structure used for nonresidential purposes is 2.564%. Multiplying this rate by $20,161 amounts to a depreciation deduction of $517 for 2002.

5. Categorize and Total your Home Office Expenses.

After you've gathered all the bills and receipts for your home office expenses, sort them into categories, and then total each category so you can enter the expenses in the right places on your tax return.

Suggested expense categories:

    * Electricity
    * Gas
    * Home repairs
    * Housekeeping costs
    * Insurance on your property
    * Maintenance costs for keeping your property in normal working order
    * Mortgage interest
    * Real estate taxes
    * Rent
    * Sanitation
    * Telephone
    * Water

Note

If you are an employee, working from your home office, use Form 2106, Employee Business Expenses, to record all of these totals. If you are an employee, you cannot count any expenses for which you were reimbursed by your employer. See Home Office Deduction for Telecommuters.

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