If you operate a business out of your home, you could have some substantial deductions coming your way. About this time of year, you can find plenty of articles about the fact that you can deduct part of your mortgage payment, taxes and interest from the income derived from a home-based business. With those myriad articles available to you – I’m not going to write about the broad home office deduction topic.

Instead, I want to direct your attention to IRS Publication 587 “Business Use of Your Home (Including Use By Day-Care Providers).” Now, simmer down – I know this sounds like a bunch of excitin’ readin’, but trust me, you could substantially cut your tax bill by operating a business out of your home.

This article is going to deal with the fine print in IRS Publication 587. The fine print is where you get the tax savings. If you want the whole picture about how to qualify for all these deductions, then definitely get to this Publication online at www.irs.gov. Just search “home office deduction” and you’ll have plenty of great forms and publications at your fingertips.

What’s really exciting is that when I had to fix my heat pump this winter – a portion of that bill will be deductible for me, since I operate a business out of my home. In fact, nearly all home care expenses can be deductible as long as my office area is affected. The percentage calculation depends on your square footage of your house or the number of rooms in your house. If your office is 120 square feet and your house has 2,400 square feet, then your office makes up 5 percent of your house.

The rooms in my house are relatively the same size as were most homes built in the mid-1970s, so I use the room formula. There are eight rooms in my house, so I deduct 1/8 of my qualified expenses from the income derived from my home-based business.

To find the nitty gritty of deductions, turn or scroll down to page 8 of Publication 587. You’ll find clear instructions on what type of expenses are allowed.

IRS.gov says: “The part of a home operating expense you can use to figure your deduction depends on both of the following.

• Whether the expense is direct, indirect, or unrelated.
• The percentage of your home used for business.”

Publication 587 even has a table, describing some sample expenses that are deductible and what aren’t.

Direct expenses are those which are only for the business part of your home. For instance, if you painted and carpeted your office space – that expense would be totally deductible (but be careful if you operate a Day Care – see instructions).

An indirect expense would be expenses for upkeep and operation of the entire home, such as insurance utilities and general repairs. Then the deduction would only be the percentage of your office space. If your utility bills for the year ran $5,000 and your home office made up 5 percent of your house, you could deduct 5 percent of those utility bills or $250.

An unrelated expense would be something like lawn maintenance or painting a room in your house that is not used for business. Those expenses would not be deductible as expenses on the home-office.

Publication 587 lists the following expenses as items that can be used in your home-office deduction:

• Depreciation
• Insurance
• Rent
• Repairs
• Security system
• Utilities and services

I was most intrigued by the home repair deductions. Just so there’s no misunderstanding, I’ll quote the IRS directly on this one:

“The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. For example, a furnace repair benefits the entire home. If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. Repairs keep your home in good working order over its useful life. Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks.”

Be forewarned – all these deductions come with a substantial string attached. Once you sell the house, all those deductions you took for the home office are then calculated to determine your recapture tax. In other words, some of the profit of your home sale will be taxed.

EDITORIAL NOTICE: Please consult a tax professional before launching into taking these deductions for your home office. If you get that pretty brown envelope from the IRS some day, requesting a personal meeting with you to question your home office deductions, I don’t want to hear that you were waving a copy of this article around during the audit to substantiate that you could take all those questionable deductions. Get sound, tax advice, before proceeding.

Published: March 21, 2003

Use of this article without permission is a violation of federal copyright laws.

Mr. Carr is an award-winning real estate broker in Northern Virginia and authored "Real Estate Investing Made Simple: a commonsense approach to building wealth." He also contributed to Donald Trump’s book, "The Best Real Estate Advice I Ever Received," and is an active trainer and coach of top producers in the Washington DC market. As a sought-after expert on real estate, Mr. Carr has been featured on CNN, various broadcast outlets and was the former real estate editor for The Washington Times. He accepts questions at his blog www.RealEstateOlogy.org.