Some lawyers choose to limit overhead by working from home. They may arrange for supplemental virtual services and conference room access. While not every practice area may lend itself to working from home, technology has made this a more common choice, especially among lawyers just starting out. Besides the obvious office rent savings, working from home confers significant tax benefits. Your business structure, e.g., sole proprietorship or corporation, will dictate how to report. IRS Publication 587 lays out the rules in language even a non-tax lawyer can understand.
Principal Place of Business
To qualify for home office tax benefits, your home office must be your principal place of business. Your office space must be used exclusively for the purpose of running your business. Working on the dining table will not qualify, but fitting out and using the second bedroom as your office does. Pinterest shows lots of ideas for turning a closet into an office or, as some sites put it, a “cloffice.” Your home office deduction is based on the square footage used for your law office compared to the entire square footage of your home. This percentage number is the measure for all sorts of deductions you may have missed.
1. Your residence. You can deduct the appropriate percentage of your rent. If you own your home, a portion of your (already deductible) mortgage interest and property tax is allocated as a business expense.
A significant question is whether to claim depreciation of the home office portion of a home you own. The depreciation deduction can be big. The downside is that when you sell your home, you will recapture the depreciation as ordinary income. Currently, the maximum applicable rate is 25 percent. Contrast this with the $250,000 ($500,000 for a married couple) capital gain exclusion which would otherwise apply. You may find that the better choice is to skip depreciation, a choice which does not stop you from claiming other home office deductions.
2. Utilities. Electricity, natural gas and water are all necessary to maintain your home office, and you can deduct the appropriate percentage of the total used by the entire residence. Business phone line expenses, including internet service, are also deductible.
3. Maintenance and repairs. Repairs and maintenance are necessary for any physical property, including your home office. Some expenses will be assignable just to the home office space, such as creating built-ins to house office equipment. But you can also deduct a portion of whole property expenses according to that so-important percentage number. This could be for burglar alarm services, an exterminator or for a contractor to make sure your roof is water-tight.
4. Casualty loss experience and prevention. Hurricanes Harvey, Irma and Maria have heightened our awareness of the need to prepare for loss. You can deduct a percentage of your renter’s or homeowner’s insurance premium as well as other insurance to protect the premises, such as earthquake or flood insurance. If you do suffer a loss that affects the entire property, you would report it as affecting both personal use property and business and income-producing property.
5. Every business mile is deductible. You cannot deduct for mileage to commute between your home and office. But if your home is your office, every business mile is deductible. If you are going to court, the law library, the office supply store, or a client office, you will start measuring your mileage deduction from the moment you back out of your parking space. Keep a diary of your business miles, perhaps on your calendar app or with a specialized mileage app, and also note your beginning and year-end total mileage. You will need all that at filing time.
Keeping It Simple
Since 2013, the IRS has provided an alternate method simpler than calculating your actual expenses. You can deduct $5 per square foot of space used exclusively as a home office, up to 300 square feet. Depreciation is not allowed, so recapture does not apply.
Using this method eliminates a lot of work at tax time. If you are working from a remodeled closet in your apartment, the simplified method may be a good choice. If you are working from a room in your single family home and paying vendors for maintenance services, using the simplified method would probably cost you a significant amount of money in lost deductions.
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