Insurance, Utilities, Repairs, and Decorating

The following discussion applies to the home office deduction if you are using the regular method to determine the amount of expenses you may deduct for business use of a home. However, the simplified method is also available if you prefer not to calculate an allocation of these and other expenses.

If you qualify for the home office deduction, you may claim a portion of certain types of expenses that are associated with your home but are not deductible by the average homeowner. These expenses include insurance, utilities, repairs, security system expenses, maid service, garbage disposal, and decorating expenses.

With all of these expenses, the general rule is that if a given expense pertains only to the home office, the entire expense will be deductible as a "direct" home office expense. If the expense applies to the entire house, it's an "indirect" home office expense and only a proportionate part of it will be deductible. And if the expense applies only to the non-business portion of the house, none of the expense will be deductible. Also, if you did not operate the business for the entire year, you may only deduct expenses that pertain to the portion of the year in which the office was used.

Insurance. You may deduct the business percentage of your homeowner's or renter's insurance as part of the home office deduction.

Do not include the costs of any business insurance you carry or special home office policy riders in this figure. Those costs apply specifically to the business portion of your home, and are fully deductible as ordinary business expenses, not as part of the home office deduction. This distinction can become important if your home office deduction is limited by the amount of your business income.

Utilities and services. As a general rule, you can deduct the business percentage of your utility payments for heat and electricity, and for services that pertain to the entire house, such as trash collection, security services, and maid or cleaning services.

Warning IRS regulations indicate that lawn service is generally not deductible as part of the home office deduction, even when the home office is used as a meeting place with clients (who presumably view the lawn as they enter the residence).

If you pay for a utility or service that's not used in your business at all, you can't deduct any portion of the expense. For instance, if you buy propane fuel that is used only in your kitchen and your business does not involve cooking, no part of the propane bill is deductible.

If you believe that your business accounts for significantly more (or less) of a particular utility, you should increase (or decrease) your business percentage of that utility bill accordingly. This is not an exact science, and the IRS will accept a reasonable estimate.

Example Leona Grossberg is a cosmetics company representative who qualifies for the home office deduction. She has an electric bill of $400 for lighting, cooking, laundry and television. Only the lighting is used for business. She figures that $250 of the bill is for lighting alone. Because she uses 10 percent of the house for business, $25 may be deductible as a business expense.

Telephones. Telephone bills are considered direct business expenses, and are not part of the home office deduction. Therefore, you may be able to deduct a portion of your home or cellular phone bill even if you don't qualify under the home office rules.

In any event, you can't claim any deduction for the basic telephone service on the first telephone line in your home, or on your cellular phone. These are considered to be personal expenses that you would incur even if you did not own a business. However, you can deduct any separately stated charges for local or long distance business calls. You can also deduct the cost of bringing a second phone line into your home, if you use the line exclusively for business.

Repairs and decorating expenses. Expenses that exclusively benefit your business (for example, repairing the drywall and repainting a former bedroom that is now your office) are considered "direct" home office expenses and are fully deductible. Expenses that benefit the entire home (for example, patching the roof so it doesn't leak, or recarpeting the entire house) are considered "indirect" home office expenses that are proportionately deductible. And expenses that benefit only the personal portion of the home (for example, installing a whirlpool tub in the master bedroom suite) are not deductible at all.

It's sometimes difficult to distinguish between a repair, which is deductible (fully or partially) in the year it was made, and an improvement, which must be depreciated over the course of property's useful life. The IRS says that an improvement is something that materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. A repair, on the other hand, is something that keeps your home in ordinary efficient operating condition but does not add to the value of your home or prolong its life. If repairs are done as part of extensive remodeling or restoration, the entire job is considered an improvement.

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