Is Building a Basement Home Office Tax Deductible?
Many taxpayers have home-based businesses and wonder if a home office is tax deductible. The IRS states that to claim a business deduction for a home office, the taxpayer must exclusively use the home office for business. Building a basement home office is deductible if it is used exclusively for business and is regularly used for business. The home office must be the principal place of business or where customer meetings take place.
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Background
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The home office deduction is very popular. According to the Wall Street Journal, approximately 3.2 million people claimed the home office deduction in 2005, the latest year of available statistics. The range of the deduction depends on the percentage of the house used for business purposes. In addition, the deduction is limited if the gross income from the business is less than the total business expenses. A basement home office must be measured as a percentage of the entire house's interior square footage to determine the percentage of the house used for business.
Depreciation
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If a homeowner qualifies for a home office deduction, there is a possibility of claiming depreciation expense. Depreciation is a deduction for the wear and tear on property or equipment used in a business. The IRS states that the value of the land cannot be depreciated. But the wear and tear on the part of the home used just for business can be deducted. When the home is sold, the taxpayer will recover the cost. Building a basement home office could be considered a permanent improvement, but it must give the home a new use, and not just be a repair job.
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Travel, Meals and Entertainment Costs
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Once a basement home office is up and running, there are yearly business-related expenses that may be deductible. According to SmartMoney, self-employed taxpayers with home offices may be able to deduct the cost of driving from home to locations where business is conducted. The IRS states that taxpayers can deduct daily transportation costs from the home office and another work location in the same business or trade. The IRS states that meals and entertainment can sometimes also be deducted. The claim must be job-related and must not have been reimbursed by an employer.
Warnings
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According to MSN Money, many taxpayers who claim the home office expense do not pass the exclusive use test. In addition, many taxpayers believe that the home office deduction is a red flag that leads to IRS audits. The IRS has no official audit red flags, and there is no evidence a home office will cause an audit. According to the Wall Street Journal, the Government Accountability Office did compile statistics on deductions claimed by sole proprietors compared to sales. Taking deductions above the average is thought to raise the interest of the IRS by some tax experts.
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