Wednesday, September 03, 2008

Tax and the garden office in the USA

Earlier in the year we ran a series of articles about the tax implications in the UK of buying and running a garden office written by tax expert Alan Young. Now June Walker, a specialist Tax & Financial Advisor to the Self-employed in the USA, has very kindly offered to do a similar occasional series for the many Shedworking readers based there. Here's her first Q&A column, How do I deduct the costs of building a home office?

Question: My husband and I are partners in our home-based business. When we bought our home 2 years ago, my husband set up his office in the attached garage. We finally saved enough to officially convert the garage to office space. We're spending a lot on county permits, fees, plans, materials, etc. To make it even more complicated, the county is requiring us to build additional covered parking on our property in order to turn the garage space into residential (office).

What portions of the costs associated with remodeling this office and meeting the county's requirements are legitimate deductions? Will they be direct expenses, or a percentage of the home maintenance?

Answer: All expenses -- materials and permits, etc. -- related to building or remodeling a business structure are part of the cost basis of the building. They are all business costs. However, they are not "direct" expenses as you call them. For instance, repairing a window in your office for $100 is a $100 expense that you can deduct immediately.

Building or remodeling is considered a capital improvement cost. For a business building the cost must be written off over 40 years. It's call depreciation. So, if you spent $40,000 on your new building you would get to deduct $1,000 per year for 40 years.

You say that you and your husband are partners. Be sure to talk with your tax pro. A husband and wife partnership is the least tax advantageous setup for you guys.
June's blog is a mine of information for anybody working from home, whether in a garden office or not, and is well worth a long browse as is her main site here where you can find more details about her book, pictured at the top of this post.

2 comments:

  1. Partnership in the general sense or as a legal structure?

    If the business is incorporated it would be best to pay those fees with personal money and not business money. You don't want any part of your home owned by the business. If something goes wrong, your house is not protected by the corporate umbrella.

    Instead, you can set up a formal rental agreement between the company and yourself and pay yourself rent from the business.

    I'm a small business owner and not an accountant/lawyer, so take this with a grain of salt.

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