How do I deduct the costs of building a home office?

Hi June,

I just found your site and am enjoying it, and learning a lot.

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?

I've looked everywhere and can't seem to find an answer to this. I have a tax person--but they are not a self-employed expert! I appreciate any advice you can offer.

Thank you. Jolene


Hello Jolene,

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 called 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. You might want to take a look at these:
Husband-Wife Business and Insurance
Husband & Wife Business
Designers Dozen: Tax Saving Tips for the Graphic Artist tip #4.

Best,
June