Seperate building,

[rsevrie]

We have a Self employment business, it all remote, we are currently using 30 SF and we need more space. T here is a old shed that seperate from the house. it about 96 sf. It needs work to make it useable for office, new drywall, replace old siding, adding electric system, Heating/AC system. 

Facts as we understand it: if we wrong please corrected us. 

• The cost will be 100 percent direct cost. 
• Internet and electric will be shared so we will need to divide  per Sf add 96 sf on top of the total house and claim 96 SF portion. 

here what we don't understand or can't figure out. 

• do we write off the direct cost of remodel the shed on one tax return or do we have to deprecate it over years? we expect the cost to be around 4-8k. 
• do we still take the $5 per sf deduction for home office or no because it a separated building? 

[AmeliesUncle · Accepted solution]

Yes, it is 100% business use.

As far as I know, you are still allowed to use the Simplified Method for the Home Office, even if it is a separate building that is part of your 'home' property.  That means yes, you have the OPTION to use the $5 per square foot method.

That method has the electricity, internet and depreciation of the building built-in to it, so you would NOT take the $5 per square foot AND the other expenses.  

If you choose to use Actual Expense (not the Simplified Method of $5 per square foot), yes, you would prorate the electricity and internet.  The method you described is the most common and is usually logical.  For the building, you would depreciate the cost (your remodel expenses, plus any cost of the original building, such as the foundation, framing and roof).

Be aware that whenever you eventually sell your home, that separate business structure may not qualify for the $250,000/$500,000 tax-free exclusion for selling your principal residence.