If you work from home as a freelancer or operate your business in a home office, you may be eligible to use home office depreciation. When preparing your taxes, you can typically take a deduction for your home office expenses as well as the cost of the assets you purchase. Continue reading to learn more about calculating home office depreciation, home office deductions, and home office expenses.
A business asset is classified as any property used to produce income and has a useful life for longer than a year. Common examples of business assets include:
- Home office furniture
- Software programs
When it comes to accounting for home office depreciation, you typically have two choices. You can spread out the cost of the purchase over a specified number of years or deduct the full cost of the equipment in the year it was purchased.
In either case, you should figure your the equipment expense on Form 4562, Depreciation and Amortization. If you choose to spread out the cost of the equipment over a specified number of years, you are depreciating your property and using the home office depreciation provision. If you take the full deduction for the equipment in the year you purchased it, you should use Section 179 deduction.
Home Office Depreciation vs Home Office Depreciation
In many instances, Section 179 or taking the home office deduction will produce the largest effect of decreasing self-employment tax and income tax. However, spreading the cost of the equipment out over several years offers future tax benefits.
It allows you move the expense to the future, which will reduce taxes over several years in the future. Savvy business professionals use this method to create a smoothing effect on future tax liabilities.
As a general rule of thumb, using the home office depreciation strategy is the best strategy when you are expecting increasing income over the next few years. By using the home office depreciation strategy, it will produce greater tax results in the future instead of taking the deduction during the current year.
If your self-employment or freelance income is higher than normal, using the home office deduction through Section 179 will help lower your taxes and yield greater tax savings.
How Long Will the Equipment Last?
Another strategy is to consider the amount of time you expect the equipment to last before it needs to be replaced. If you are likely to replace the equipment in a year, Section 179 may be the best solution. For each asset you purchase, you can separately use Section 179 or use the home office depreciation. Although this may make your tax return preparation and small business bookkeeping more difficult, it will also provide you with the most flexibility in optimizing the final tax calculations.
Claiming Your Home Office Expenses
One of the best things about being self-employed or working from your home office is the ability to take a deduction for home office expenses. You get to convert a portion of those home office expenses into a business expense that is tax deductible.
However, all home office deductions have limitations. You are unable to deduct more than your business net profit. All home office deduction that is unused can be carried over to the next year.
Calculating Home Office Expenses
In order to calculate your home office expenses, you should use Form 8829. This form helps you calculate the percentage of your total home expenses allocated directly to your business. You can use one of two ways to calculate the percentage:
- By the Number of Rooms in Your Home - Count the total number of rooms in your home. The percentage will be the total number of rooms in your home divided by one, which will be your home office.
- Percentage of Square Feet - Calculate the square footage of your home and measure the size of your office. The ratio of the two will determine the percentage of your home office.
Your home office expenses may include property tax, rent, mortgage interest, homeowners insurance, repairs, utilities, and renters. However, it's important to know that any home office depreciation taken on the house will result in taxable gains as soon as the home is sold by the process of depreciation recapture.
Contact John F. Dennehy Jr., CPA., PC
Both section 179 deductions and depreciation are used to reduce self-employment tax and income tax. However, determining whether to use home office depreciation or home office deductions can be a complicated process.
Instead of attempting to go at it alone, the experts at John F. Dennehy Jr., CPA., PC offer decades of experience helping business owners minimize their tax liability.
Contact John F. Dennehy Jr., CPA., PC today for a free and professional tax assistance consultation.