Home Office Deduction
If you rent your home, the home office deduction is usually fairly simple. You deduct a portion of your rent and utilities that account for your home business use. For example, let's say your home office takes up 25% of your total rented home. Then you would deduct 25% of your rent and utilities accordingly, noting on Form 2106 both the percentage and the amounts deducted, and deducting the total at the bottom of Schedule C.
Homeowners have a more complex scenario. Similar to renters, you deduct a percentage of your mortgage, property taxes, and utilities. However, most homeowners won't automatically think as they repair the plumbing in the bathroom that they should capture a percentage of the cost as part of their home-based business expenses. According to CPA Doris Forman, "It's part of the home; so, yes, that usually could be included." However, Forman cautions against thinking of the home office deduction too simplistically; yard maintenance is usually not deductible, for example.
Doris Forman is a CPA based in northern California. She can be reached at 510-420-7077.
Homeowners also have an additional, somewhat complicated deduction known as depreciation. Forman gives the following example: "Let's say you have a $400,000 home, and 25% of that [space] is your home office. Now, 25% of your home price is $100,000. Every year for 39 years, you would deduct $2,554 for depreciation."
It doesn't end there. According to Forman, when you sell the house, you'll probably have to pay capital gains tax on the depreciation taken. "Fine," you think. "I just won't take the depreciation deduction; then I won't owe the tax later." Wrong. In most instances, the IRS will assume that you did, or may allow you to take the deduction later on if you hadn't done so earlier. You need to count on taking the depreciation deduction, and also count on paying tax on that depreciation when you sell your home.