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Be sure to claim applicable household utility costs in your home office deduction

Snowy backyard_Feb-16-2021_Kay Bell photo-resized
Much of Texas got record snowfall on Feb. 14-15, with around 6 inches covering our backyard. Thank goodness for some much welcome sunshine today, but it's still below freezing, meaning our heater is working overtime! (Photo by Kay Bell)

We have sunshine here in Central Texas! Still, the high temperature today in the greater Austin area is not expected to break the freezing mark.

That means my home's heater is still in overdrive. And that means my next bill is going to be ginormous.

The only consolation, is that I can count part of that heating bill as a home office expense on my tax return next year. When I do, I will be repeating a claim I'll make on my 2020 Form 1040 that I'll file this tax season. It's a tax routine I've been in for the last 15+ years that I've been working from my home.

You can do the same if you qualify for the home office deduction. Basically, you get to count a portion of home-related expenses that typically aren't deductible. This includes certain residential maintenance and operational costs, such as utilities.

Only the business amount: Before you get too excited about writing off, like me, the Polar Blast's triple digit heating bill, note the phrase from the previous paragraph: count a portion of home-related expenses.

You can deduct only the amount of your residence's expenses that applies to your home office.

That's the space, either a separate room or a portion of a room that meets the Internal Revenue Service qualifications. Notably, you use the area/room exclusively and regularly to conduct your business.

My earlier home-office post elaborates on the requirements to claim this deduction. It also explains why it won't work for you if you're an employee (that is, someone who's getting W-2 income), but have been working from home as a COVID-19 precaution.

So you'll have to figure out how much of your home that you use to exclusively and regularly (yes, it bears repeating) do your job. That's generally computed as a percentage of your residence's overall square footage.

For example, your house is 2,500 square feet. Your home office is a 250-square-foot room. You can then claim 10 percent of your home's annual heating, air conditioning and water bills, as well as other common housing expenses, that make it possible for you do your work from there.

OK, with that initial math done, here's a closer look at some of the work from home residential write-offs you can claim.

Utilities and other whole house expenses: Since I'm sitting here listening to my heater keep cycling to stay at 68 degrees, let's start/stick with utilities. You usually can deduct the business percentage of your utility payments and other services that pertain to the entire house.

In addition to the usually heat, cooling and running H2O, this also covers such things as trash collection, security services, pest control costs and even cleaning services. Remember, though, that if you're a dedicated do-it-yourselfer, the costs of material to complete the repairs are deductible, but not the cost of your own labor.

But while your housekeeper who keeps your stacks of work material from literally gathering dust counts, your lawn service likely doesn't. The IRS says that payments for upkeep of your exterior property generally is not deductible allowed as part of the home office deduction, even if your home is where you meet clients, who will see your plantings when they arrive.

Also, if you pay for a utility or service that is not used at all in your business, no portion of it is deductible. For example, you hire a crew to paint only your master bedroom. While sleep is key to doing a good job and your new hue helps you nod off, it you don't work from a part of that room, it's not deductible.

But if you paint just your home office, that direct expense is allowable.

Types of home expenses matter: Basically, the deductibility of an expense in connection with your home office depends upon whether it benefits just your residential work space, your entire house including your home office or parts of your home not associated with your home office.

The IRS categorizes theses as —

  • Direct expenses. They exclusively support your business, such as adding wall shelving to a bedroom converted to your home office.
  • Indirect expenses. These benefit your entire home, such as re-carpeting your entire house.
  • Unrelated expenses. These are just like the name sounds. They are specific to an area of the home that doesn't matter to your business, such as installing a game system in your family room.

The table from IRS Publication 587 reproduced below breaks out some direct, indirect and unrelated residential expenditures and their home-office deduction ramifications.

Type of Expense

Description

Deductibility

Direct

Expenses only for the business part of your home. Examples include painting or repairs only in the area used for business.

Deductible in full*

Indirect

Expenses for keeping up and running your entire home. Examples include insurance, utilities and general repairs.

Deductible based on the percentage of your home used for business*.

Unrelated

Expenses only for the parts of your home not used for business. Examples include Lawn care or painting a room not used for business.

Not deductible

*If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.

 

Paying for your home and home office: Your monthly mortgage or rent payment is probably your biggest home-related expense. You can count part of this cost toward your home-office deduction.

Many homeowners already itemize and claim their home's mortgage interest payments, as well as property taxes on Schedule A. If you have a home office, you can apportion part of these payments, again using the square footage percentage, toward your home office. Your Schedule A deduction amount then will be reduced. For most homeowners who work from home, it's more advantageous to claim at least part of the cost as a business expense.

If you rent, this is a big bonus, since this monthly housing payment isn't deductible otherwise. But you can claim the portion of your rent attributable to the business use of your home as part of the home office deduction.

Claiming the costs on Form 8829: A review of Form 8829, the IRS document you use to claim the home office deduction, as well as its instructions and the aforementioned IRS Publication 587 offers more on potential deductions.

Form 8829 home office deduction TY 2020 (2)

The relevant section of 8829 is highlighted in the reproduction above, which has been added to the ol' blog's Tax Forms Fiesta! page.

Repairs, capital improvements and your home office: Homeowners also know that home maintenance and repairs get different tax treatment. That's true when it comes to the home office deduction, too.

If you can claim the home office deduction, then you can deduct a portion of your repairs. These are actions that keep your home in ordinary and efficient operating condition. And, per the earlier discussion and IRS expense type table, just how much is deductible again depends on whether it's a direct or indirect expense.

Generally, repairs include things like fixing interior walls and floors or exterior components like roofs and gutters; painting the whole house; and repairing a furnace or air conditioner that was worn out, for example, by extreme weather events. Again, the home office deduction amount uses the percentage of space calculation.

Capital improvements, however, are added to the basis of the property. These are things that add to the value of your home or considerably prolong its useful life. They also help home sellers realize a smaller profit and possible escape tax on the proceeds.

But when it comes to your home office, you can claim depreciation on the portion of your home that serves as your home office. This allows you to account for costs over the years of such things as your payments toward your mortgage principal.

Yes, it's a pain, but your tax pro or even your tax software can help with this calculation.

And if you're tempted to just blow it off because of the hassle, think again. It not only adds to your home deduction amount now, but later when you sell your home, the IRS will require you to reduce the gain received on the sale of your home by the amount of allowable depreciation, even if you didn't claim it.

Now I'm heading down to my kitchen to make a late lunch, the cost of which is not deductible as a business meal expense. But by working at home, at least I get to wear my house slippers while I dine!

You also might find these items of interest:

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