The Home


by Tom Van Hazebroeck       

   WHEN WE MET LAST MONTH, we discussed the need for regular and exclusive use of the home office to qualify for a home office deduction. We began discussing the types of expenses that are includable when claiming a home office deduction and hinted that you are not allowed to deduct the full amount when we ran out of space. We are back to complete the tale and make you king of your castle or at least your home office. As we stated last month, your home office deduction is limited by:

  • The percentage of your home used for business
  • Your deduction limit

   The most commonly used method to compute the percentage of use is the number of square feet in the home office divided by the total square feet of the home. Do not include the garage or unimproved basement space in determining the square footage of the home unless that is where your office is located. If all of the rooms of your home are about the same size, you can also divide the number of rooms used for business by the total number of rooms. Any reasonable method may be used to determine the business percentage.
   Your home office deduction is limited by the amount by which your gross income exceeds all other business expenses including depreciation. When your net profit before home office expenses is less than the home office expenses, your deduction will be limited. The home office deduction is computed in tiers. First, you deduct the business portion of your mortgage interest and real estate taxes. Next, your other direct and indirect expenses. Finally, depreciation of the business portion of the home. Any excess expenses may be carried over and become subject to the deduction limit for the next year.


   You meet all of the requirements for deducting expenses for the business use of your home. You use 10% of your home for business. In 2000, your business expenses and expenses for the business use of your home are deducted from your gross income in the following order:

Gross income from business


Less: Business expenses unrelated to the use of your home, i.e. supplies, auto expense, depreciation on equipment, licenses & fees, etc.


Business portion of deductible mortgage Interest and real estate taxes (10% )


Deduction limit


Less: Expenses related to the business use of your home such as utilities, insurance, repairs


Depreciation allowed on the business use of your home (10% = 1,000)


Carryover to 2001 (Depreciation of $1,000 - $200 deduction taken in 2000)


   Depreciation is a special allowance you get for the wear and tear on the portion of your home used for business. It does not include the cost of the land under the home. Business use of the home is considered nonresidential use. Depreciation is computed on the business portion of the cost of the home (and improvements) less the value of the land over a 39 year period using the straight line method. The IRS provides tables of the percentages to use based on which month of the tax year you first began using your home for business.

Where To Deduct

   Deductions for business use of the home are claimed on Form 8829. Where they flow from there depends on whether you are a self-employed person or an employee. For the self-employed filing their Form 1040 tax returns for 2000, deductions flow onto Schedule C, line 30 or Schedule F, line 34. Employees must itemize deductions on Schedule A, line 20 (Form 1040) to claim a deduction for business use of the home as well as other employee business expenses. In some cases they may also need to complete Form 2106.

A Final Caveat

   Having jousted with the IRS and won the day as you return to your castle (or home office), remember that claiming a home office deduction has its traps. You may lose your exemption from paying capital gains tax on the portion of your home used for business. That is, unless you plan ahead. Alas, that is a subject for another day. Rejoice for now.

   As always, this article discusses the general rules. There are exceptions and interpretations that may apply to you. More detail can be found in IRS Publication 587 Business Use of Your Home. Or just consult with your favorite CPA and let him fight this dragon for you.

Tom Van Hazebroeck is a CPA at George A. Pennington & Co. Mr. Van Hazebroeck can be reached via phone at 404.233.9415 or email at .