Claiming Backyard Office as Business Asset

[chatkins]

Background:

In April 2022, my wife and I (filing jointly) built a 200sqft shed on a concrete slab in our backyard and converted it into two separate 10x10ft offices with insulation, drywall, electricity, internet, and HVAC minisplits. This was initially done for our remote W-2 jobs, but I was laid off in Jan 2023, and have since been using my office 100% for my freelance self-employed graphic design business. My wife still uses her office for her W-2 job. I'd like to claim my office as a business asset as I have no intention of going back to a W-2 job. 

Questions:

1. What is the best way to categorize this asset? I've read some people claiming these backyard offices as non-residential real estate property (with the 39yr depreciation), but others are claiming it as "Intangibles, Other property".
   
2. If I claim it as "Intangibles, Other property", how do I determine the asset class life? I reviewed Publication 946 and don't see anything that fits this use-case. The shed is supposed to last 10-15 years with good maintenance, but the concrete would obviously last longer.
   
3. If I claim this as a business asset, can I also claim it as Home Office Deduction, or would that be considered double-dipping? 

[PatriciaV]

It depends. If you use this space regularly and exclusively for your business, you can claim a Home Office Deduction for either your actual expenses or the standard rate of $5 per square foot ($1500 max). Using Actual Expenses does allow you to claim depreciation on the building.

Or you can report the construction cost for your half as a Business Asset for depreciation (commercial building) and also claim your related expenses. But you can't do both.

If the business owns the building, claiming it as a business asset is the more logical choice. But if you personally own the building, the Home Office deduction is more appropriate.

It is not an intangible, since it has a physical presence.

For more help, see:

• TurboTax Tax Guide: The Home Office Deduction
• IRS Simplified Option for Home Office Deduction
• Where do I enter the home office deduction for my business?

[JC 2]

Thank you for this information Patricia. @PatriciaV 

So if we record it as a Business Asset, we will never take the home office deduction going forward?  And how exactly would we do the accounting as a business asset?  Thank you!!

[JotikaT2]

If you decide to record the asset as its own business asset, you would not take the home office deduction going forward.  

Instead, all expenses that are incurred within that office location would be deductible for the business.  

To add the asset as part of the business, you will need to add it in TurboTax. Please see this link for steps to enter the asset within TurboTax.  TurboTax will select the appropriate depreciation method based upon the type of asset entered into the program.   Just follow the prompts and carefully answer each question to ensure the asset is classified correctly.

@JC 2