Can I Claim Renovations to My Home Office?
Claiming a tax deduction for your home office is one of the benefits you enjoy if you operate a home-based business. If you qualify, the IRS allows deductions for such items as home office furniture, supplies, equipment and mileage. You may also claim deductions for painting and repairs. Permanent improvements such as a renovation adds to the cost basis of your home used for calculating depreciation expense, which is deductible.
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Home Office Deduction
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Home office deductions are easier to claim if you are self-employed; however, you must meet IRS guidelines. In general, your home office must be strictly for your business needs and the principal place where you regularly and exclusively do business, as in meeting with clients, patients or customers. Having a separate structure apart from your home such as a garage or guesthouse qualifies as a home office. If your home office is the principal place where you perform administrative and management activities, it also qualifies for a tax deduction.
Business Percentage
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To determine how much to deduct, figure out your business percentage or how much your home office is in proportion to your home. If your home office is 300 square feet and your total home is 3,000 square feet, your business percentage is 10 percent. You get to deduct up 10 percent of your qualifying business expenses. For example, you may deduct 10 percent of your mortgage interest as part of your home office deduction.
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What Qualifies
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If your home office meets IRS requirements, you may deduct a percentage of mortgage interest, rent payments (if you are not the homeowner), utilities, homeowner's or renter's insurance, equipment, software, painting and repairs. The IRS handles permanent renovations to your home office differently. Instead of claiming the tax deduction for the improvements, the IRS wants you to add the total expense to the cost basis of your home. You can recover home office improvements if you claim depreciation as part of your home office deduction.
Repairs Versus Improvement
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A repair does not add value to the property or increase its lifespan whereas an improvement does. An example of a home office improvement is replacing electric wiring or plumbing. The IRS allows you to depreciate permanent home office improvements over 39 years. With a simple repair, you may deduct the expense from you taxable income in the year you made the repair.
Insight
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The rules for home office deductions change. If you are unsure what qualifies, talk to a tax adviser regarding your situation. Simply wanting to make home improvements to your property and categorizing these as home office improvements may trigger an audit from the IRS, particularly if the home office doesn't qualify. The IRS scrutinizes home-based business tax returns. Document all your expenses should your eligibility or deductions come into question.
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