Maximizing Home Office Deductions

Many small firms - and freelance bookkeeping practices - are run through home offices.  The general rule for deducting any expenses associated with that home office is that a deduction is allowed only if you use the home office regularly and exclusively for business purposes.  The home office must be a principal place of business or a place to meet or do work for clients or customers in the normal course of doing business.  For employees, the home office must be used for the employer's - not the employee's - convenience.

Assuming that you qualify for the home office deduction, you may deduct:

• expenses directly related to the home office (e.g., the cost of painting a room that is used exclusively for business);
• a relative share of some expenses, e.g. real estate taxes, mortgage interest, utilities, insurance, repairs; and
•  depreciation of the portion of the home used for business.

Please note: If you sell the home at some point, the amount deducted for depreciation expense over the years is subject to recapture as ordinary income. 

Example:  For the last 10 years, you have been taking $5,000 a year in depreciation expense for the portion of your home devoted regularly and exclusively to your consulting firm, for the total accumulated depreciation to date of $50,000.  In 2015, you must report an added $50,000 in ordinary income on your tax return.

Tip:   Before taking depreciation on a home office, consider how long you plan to own the home and if the possibility of recognizing ordinary income in acceptable.  Consult your tax advisor.