With the emergence of new technologies, it’s no wonder that people are increasingly interested in working from home. If you’re just starting out a law firm as a solo practitioner and are working from home, you have a ton of immediate savings to look forward to. You can save on overhead. You can save on travel expenses. You can save on eating out. The immediate savings are seemingly endless.
There are, in addition, other savings that are less apparent from the start. If you work from an office – a separate room, not just a table in your apartment – you might be eligible to write off certain expenses on your taxes.
First things first: you need to take the appropriate measurements. Measure your entire home in square feet. Second, measure your office. Third, divide the latter by the former (e.g. 100 sq. ft. / 2,400 sq. ft. = .04). The resultant percentage (4 percent) will serve as the basis for a number of deductions.
It should be noted that there are other methods for determining the business percentage of your home. These calculations can be found in IRS Publication 587.
For starters, you can deduct a portion of your utilities. Just tally up the total – including electricity, gas, trash removal, water, separate business phone line and internet – and deduct the business percentage. That deduction can then be appended to your tax return. Note: your business phone line will be deducted on a separate part of the tax form.
You can also deduct a portion of house repairs. Just apply the above percentage to the total costs attributable to home repairs and you deduct that from your taxes. Of course, you can also deduct costs related to repairs in the office.
Even though you’re not traveling to work every day, you can still deduct mileage related to your business. For instance, if you need to pick up supplies, meet with a client, pick up a legal text from the library or anything else that is work-related, you can record your miles and apply them to your tax return.
Some expenses apply to the entire home, regardless of your business. These are called indirect expenses. Mortgage premiums, for example, are another potential source of savings. Just take the total amount in mortgage premiums and multiply that number by the business percentage. There may be some limitations to this deduction if your adjusted gross income is over $100,000 (or $50,000 if you file separately and are married).
You can apply this same principle to your real estate taxes, home mortgage interest, and any casualty losses. This latter category refers to damage to the home caused by storms or other similar occurrences. The amount you deduct for casualty losses will depend on the part of the home affected by the event. If your office is not affected at all, you can’t make a deduction.
Because your use of the home office will cause wear-and-tear, you are entitled to what is known as the depreciation deduction. Be forewarned that this deduction carries with it certain complexities, so you will want to do your due diligence before using this deduction. You might find out that it’s better to avoid it altogether.
Depreciation deductions can be great short-term tax savers, but there are long-term consequences that must be kept in mind. Those consequences come when you choose to sell your home. Upon the sale of your home, you’re entitled to a large sum of untaxed profit. If you’re single, you’re allowed up to $250,000 of untaxed profit; and if you’re married that number doubles to $500,000.
That’s a significant amount of money. If you decide to deduct depreciation, the property’s basis, or the amount of money you need before making a profit, will go down – meaning your profit could exceed the $250,000 (or $500,000) threshold. The depreciation deduction will also be recaptured, so when you sell the home, the amount of money deducted over the years will be subject to a rather high tax rate. These are just a few considerations to keep in mind when it comes to depreciation deductions.
As you can see, there are a number of home office deductions you can include in your taxes. Be sure to keep solid records throughout the year. And when you’re actually doing your taxes, take your time to ensure the maximum deduction, keeping in mind the potential long-term effects.
Of course some of this may change depending on what version of the tax bill passes Congress. Be sure to check AmericanLegalNews.com for the latest legal news updates.