You don't enter the construction bill as a simple "expense" like paper or ink. Instead, it is treated as a capital improvement.
- The Business Percentage: If your new room is 200 sq. ft. and your total house (including the new addition) is 2,000 sq. ft., your business use is 10%.
- Depreciation: You add the construction cost to the "basis" of your home. You then depreciate the business portion of that total basis over a 39-year recovery period (the IRS standard for non-residential/business real estate). the portion of your home that is now used for business is classified as non-residential real property.
- Direct vs. Indirect: * Direct Expenses: If you paid specifically for built-in shelving or special wiring only in the office part of the addition, you can depreciate 100% of those specific costs.
- Indirect Expenses: The general construction of the room (foundation, roof, walls) is depreciated based on the square footage percentage.
3. Entering it in TurboTax (Self-Employed/Schedule C)
To get these costs to show up correctly:
- Go to Business Income and Expenses (Schedule C).
- Find the Home Office section.
- Choose the Actual Expenses method (the "Simplified Method" of $5/sq. ft. does not allow you to claim depreciation for construction).
- When asked about "Assets" or "Depreciation" for your home office, you will enter the New Room Addition as a new asset.
- Cost: Enter the total cost of the construction.
- Date Placed in Service: The date you actually started using the finished room for business.
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