To Office at Home or Not To Office at Home by Ann Etter
There are different schools of thought regarding whether or not to use and/or claim a home office as a sole proprietor. If you are incorporated (S-Corp or C-Corp) it is very difficult to claim a home office; you absolutely should work with a CPA in that instance.
In order to be a home office, the space must be separately identifiable and must be used 100% for business purposes. This means that your exercise equipment, guest bed, family homework area, etc. cannot be part of the home office space. A separately identifiable space has boundaries, but those do not need to be walls. You can place your desk in the corner with a chair mat in front of it and your bookcase on the end of it which will create a space that you can measure. The space also needs to be a place that you can receive clients if necessary, so a corner of your bedroom won’t work.
If you have a home office you are able to write off a portion of the following against your self-employment income. The portion is based on the percentage of your home taken up by the home office. You may include storage closet space if you are only storing business materials in the closet.
- Mortgage interest (the remainder can still be written off on Schedule A if you itemize)
- Real estate taxes (the remainder can still be written off on Schedule A if you itemize)
- Homeowner’s insurance
- Repairs to overall home (roof, siding, etc.)
- Repairs to the space (painting that room, fixing the window over your desk, etc.)- 100% of cost
- Depreciation on the house
- Depreciation on upgrades to the space (new carpet, built-in bookcases, etc.)- 100% of cost divided over 39 years.
- Furniture in the office (desk, chair, etc.)- 100% of cost divided over 7 years.
- Take the “safe harbor” deduction of $5/sq ft of home office space, good for up to 300 sq ft of space. You still get to deduct the office furniture separately as above.
If your home office is 100 sq ft, you will be able to deduct a minimum of $500 off your self-employment income. If you are in the 10% tax bracket this saves over $100 in federal taxes once your income tax is combined with your self-employment tax ($66 in SE taxes plus $50 in income taxes).
Additionally, if you have a home office you get to deduct your mileage whenever you leave home for business purposes: driving to the post office to mail off a signed book, driving to the store for more printer ink, driving to meet your editor at the local coffee house, etc. Mileage in 2016 is deductible at a rate of $0.54/mile. If you drive just 2 miles a week for business and keep a log of your mileage (date, miles, business purpose), you will have 104 miles to write off, which is $56, which saves you $13. If you drive 20 miles a week, you save $130.
That’s the good news. The bad news is that a home office comes with a deduction for depreciation of your house. That is actually good news, but it leads to bad news. When you sell your home, you will need to pay tax on what is called “depreciation recapture” for the amount of depreciation you took. Depreciation recapture is taxed at your ordinary income tax rates. You will most likely need to hire a CPA that year, even if you normally do your own return. Since you also get to take the home office deduction against the self-employment taxes it is highly unusual to pay more in depreciation recapture tax than you saved in taxes over the years of using the home office. It can happen, however, so do your research and call a CPA if you need assistance.