Considering Bonus Room above Garage for Business, Does it Qualify 100% for Home Office Deduction?
So I currently have a fairly new ranch home and just in the past 2 months started up my own consulting business (LLC as S-Corp). Problem is, I have no space to conduct business with 2 little kids and a family! Now - what I'd like to do is have my builder add on a bonus room to our attached garage accessible only through my master suite so it can be 100% an office and private.
This should be 100% an expense to my company right? Looking at the IRS guidelines since it is 100% used for business it should be.. I also don't want to decpreciate the house at all. I just want to be sure the costs of adding this room to our current house (which would add say 200-250 sq ft) will be considered a business expense. I have my first invoices coming in soon totally about 15k (in May/June) right at the time this will be complete. So that should be 15k tax-free since it's 100% allocated to expenses.
Also, according to IRS guidelines I can expense 10% (240/2400 of house space is home office) of our utilities too.
Thoughts? Am I missing anything?
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Construction for new office not an expense...
I hope you're not thinking of expensing the entire $15K in 2007 as a business expense...
This is an improvement of your home & is a capital asset and is not an operating expense.
In order to get the home office deduction, you have to deduct it as an unreimbursed employee expense on your personal return (there's no Form 8829 for an S-Corp).
Another option is to have your S-Corp reimburse you for the home office expenses. So in your example, you can have the company reimburse you for 10% of your utilities (don't forget water, sewer & garbage), homeowner's insurance, and 100% of repairs or supplies for outfitting the new office (but not the construction). You can't get reimbursed for depreciation, but you don't really want to go down that road anyway. Don't bother reimbursing yourself for the property tax or mortgage interest as you'll get 100% of that on your Schedule A anyway.
Enjoy your new office!
L:)
% of "new construction" can be expensed?
Thanks Linda! Any idea what % of the job can be expensed then? Cost of materials? Any labor? Is it because the IRS concludes this adds value to the home so it's not all an expense? Let us just say the addon cost $15K and we estimate it adds $5K to the home value (33% - which is reasonable - very few things add even close to 100% of value to a home), could I expense $10K?
And I totally agree with you about the mortgage interest, depreciation, etc. Not worth it.
Can't expense construction costs
Sorry, but none of the expense to build the add-on is deductible. However, costs to decorate & furnish it are. So if you by paint, shelving, curtains, area rugs (but not wall to wall carpeting), desks, chairs, etc. are all deductible though most will be assets that must be expensed using the 179 election.
L:)
Remodeling to get 100% Home Office Deduction
Linda, what about this?
Consider remodeling. New construction to create a home
office may be 100 percent deductible in the year you do
the construction under Section 179 of the tax code. This
section enables you to take up to $10,000 of your
depreciable expenses in the year you incur them.
Section 179 Property
Sorry. Buildings and their structural components are specifically not Section 179 property. Check out the first page of the instructions for the Depreciation Form 4562.
L:)
Depreciation?
It's not depreciation. I'm incurring an expense to set up an office in order to conduct business services?
Check this out:
The Internal Revenue Service also gives work-at-home owners a break on the home-office deduction when they sell their home.
As long as your qualified home-based business is in the same dwelling as your primary residence -- rather than some unattached structure on your property -- you don't have to allocate a home sale's capital gains between the home and the business, according to "Exclusion Of Gain From Sale Or Exchange Of A Principal Residence".
The small windfall is a switch from the original requirements set forth by the Taxpayer Relief Act of 1997 . The relief act's most notable provision says when you sell your home, up to $500,000 of capital gains is excluded from federal taxes for married couples who file a joint tax return. Up to $250,000 is excluded for those filing separate or single-filer returns. You must have lived in your home as your primary residence for two of the past five years to qualify for the exclusion.
Before the act was adjusted, if you used 10 percent of your home for a home-based business, 10 percent of the gain on the sale would be subject to capital gain taxes because you couldn't use the exclusion on that portion.
Maybe depreciating is a good idea?
Depreciation on your home office
Nope. If you're making an addition your home, you're making a capital improvement. This is not an operating expense. Just like if you purchased a building or even made improvements to leased property you couldn't expense it all in the current year. But it sounds like you've already made up your mind regardless of the rules. :) Good luck if you get audited.
Re the exclusion on the sale of your home, true you don't have to apportion the sale. But you do have to pay ordinary income tax on the depreciation in prior years. So if you sold your house and had a gain of $100K, but had taken $25K of prior depreciation, $75,000 would be tax free and you'd pay your ordinary tax rate for the $25K of prior years depreciation. You're only reading part of the instruction. See the section on depreciation recapture & you'll see what I'm talking about.
L:)