Home office- separate building

[Alimy22]

I have read the tax laws and don’t understand the following:  if we buld a separate shed on our property for use as a home office is the cost of building it deductible?  And if my husband, as an insurance agent, switches from being a free agent on 1099 pay to an employee, but will

still get residuals for his independent contracting work, can we still claim the home office deduction ?

[jhunt4]

The costs of building a separate structure (not attached to the house) for home office use are considered "direct expenses" of the business. Such expenses can be deducted by either adjusting the basis (cost of your entire property) or by direct expense.

[Alimy22]

But why about the part that the separate building will be for someone who is an insurance broker who is an employee but still gets residuals for the 1099 work they previously did?

[jhunt4]

If a taxpayer does not meet all of the conditions in IRS Publication 334, page 35, but is a retired self-employed insurance agent who receives residuals from sales of policies from which they earned commissions prior to their retirement, then the income gets reported on Schedule C and is subject to self-employment tax. See also IRS Publication 334, page 25.

If a taxpayer is working from home as an employee, not as a self-employed person, the home office deduction is no longer available. Depending on the state in which you reside, you might be able to deduct some work-from-home expenses such as phone and internet on your state return.

Since 2018, generally only self-employed people can claim tax deductions when working from home. If your spouse is only receiving residuals from prior sales and is not actively self-employed in addition to his work-from-home status as an employee of another company, the home office deduction is not allowed.

If the residuals are termination payments from his prior sales and your husband meets all the conditions to do so, the payments would not be reported on a Schedule C, but would be reported as Other Income on your return. To do this in TurboTax,

• In your open Federal return, choose the tab for Wages & Income
• Scroll down to Less Common Income (you may have to click Add more income and See more income to view this topic) and Show more
• Start/Revisit Miscellaneous Income and choose Other reportable income 
• Say Yes to continue to the screen Other Taxable Income. Enter your item description and the amount.

A corresponding entry will appear on Form 1040, Schedule 1, Line 21 of your return. The conditions to report the income in this manner would mean that your husband met all of the specific conditions to do so, and are outlined on page 5 of Instructions for Forms 1099-MISC and 1099-NEC found here.

Hope this helps!