Basement Finish Write-Off for independent contractor working from home

[geed]

I am an independent contractor working from home. I got my basement finished last year.

I am using one room in the basement 100% as my home office. 

The room is roughly 1/6 of the total space in the basement so I guess I'd write off 1/6 of the total cost. However, I don't know where to enter this cost or how to write the associated cost off.

[KrisD15]

To clarify

Have you been claiming a Home Office Deduction previously? 

If so, which method were you using "Regular Method" or the Simplified Method?

 If not, do you know which method you will use going forward?

Regular method is based on the percentage of a house the office uses, and includes depreciation (which cannot be ignored or "not taken" by the taxpayer). You may be able to write off more with this method, but the biggest draw-back is that when you sell your home, you will need to "recapture depreciation". 

This means you will probably need to claim the TOTAL amount of depreciation you took as taxable income when you sell your home. This is true even if you are eligible for the "home owner's exception to capital gains" and even if you didn't claim the depreciation over the years.

With the simplified method, you deduct a flat rate calculated by the square foot area of the office and there is no depreciation recapture. 

[geed]

I've been using the regular method. I had used another room in the main floor as my home office, but since last year right after my basement got finished, I've been using the new room in my basement as my home office. 

It would be great if I can deduct the whole amount without having to deal with depreciation.

I've also talked to a TurboTax agent and he suggested me to deduct 1/6 of the cost through "Home office only" repairs and maintenance. Is that the correct place to put this in? If not let me know how I should proceed.

[DanP0428]

Determine the area of the entire home including the basement and determine the percentage of that figure that is the space of the home office.  

[ColeenD3]

You can't avoid depreciation. You have turned a portion of your home into business property. Yes, you deduct expenses for 1/6 of your home. Add the improvement to the basis of the home and prorate.

[geed]

Can you also tell me how to do those in Turbotax?

1) I already had my house added as a Business Asset (this has been the case for the last 4 years since I formed my business and before the basement was finished). Now should I add additional asset as home improvement for the basement so that depreciation kicks in? What amount should I put for the amount?

2) I deduct 1/6 of the cost in home repairs section for the main home business asset?

[PatriciaV]

Yes, add the finished basement as another Business Asset for your Home Office. Allocate the total renovation costs based on the square footage you're using as an office. That amount is the basis for this asset.

Depending on the total cost, you may be able to take full depreciation this year, ie: write off the entire cost of the Home Office portion of the renovation. Look for questions regarding Safe Harbor, Section 179, or special depreciation. In effect, this would be the same as reporting the cost as a Home Office repair expense.

[geed]

This turns out to be more complicated than I thought. Here is what I've done (need clarifications on some questions)

1) Business Expenses / Home Office Expense / Home Office Asset Summary section

 I already had my home added here from previous years so depreciation has been in effect.

I've added "Finished Basement" as the second asset here in addition to my home.

For Finished Basement: I chose "An improvement to your home",

For "cost": I put 1/6 of the total basement cost,

For "date purchased or acquired": I put the date I started using my new home office,

For "Have you used this item 100% for this business since you acquired it?", I chose "yes"

For "business use percentage": I put 100%

2) Business Assets / Assets being depreciated

For "Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2021?", I said "Yes"

For "Did you make improvements to a building you used for this business in 2021?, I said "yes"

For "cost of all repairs, maintenance and improvements  is less than or equal to the smallest of these limits $10,000 or 2% of the adjusted basis of your building", I said "yes" (1/6 of the cost is around $6k)

For "do you want to take this annual election", I said "yes"

Then I created new business asset as follows:

For "describe this asset", I chose "Real Estate Property" with the start date I put for "Date Purchase or acquired"

For "how would you categorize this asset?", I chose "qualified improvement property". The other options were "nonresidential real estate" and "specific qualified improvements"

For "describe the qualified improvement property", I put "finished basement". I also put the cost and date purchased/acquired.

For "How do you want to deduct this item?", I chose "I'll deduct the full value of the item this year. (take the section 179 deduction)"

Then Turbotax auto populated the Virginia Section 179 expense for me with 1/6 of the total cost.

Does this look correct?

[geed]

I've noticed that after I performed the steps above, the depreciation shows up on form 4562 as "nonresidential real property" in part III, section B. But this is part of my primary residence. What am I doing wrong?

[ThomasM125]

It should be non-residential rental property, since you are using the space for an office that is associated with a commercial activity. It doesn't matter that the house is primarily a residence, the portion used is commercial.

@geed

[geed]

Thanks for clarifying that. So all the steps I've taken above looks correct, then?

[geed]

Anybody can confirm what I did is the right way of claiming this deduction?

[AliciaP1]

Just to be sure you've answered this question "For "Did you buy any items for any business, rental property and/or farm that cost $2,500 or less in 2021?", I said "Yes"" correctly, this is in reference to other potential assets outside the cost of the remodel to be sure the Section 179 deduction amount is calculated correctly.

Once you confirm that answer you are good for the deduction.

@geed

[geed]

I purchased a laptop, a monitor, a desk and a chair also last year and each cost less than $2500. I put them as a business expense under miscellaneous expense section. So these items are not included in 179 I think.  Section 179 deduction only contains the cost of the basement.

[DianeW777]

You are correct.  The items under miscellaneous expense are not being depreciated since you chose to use the De Minimis Safe Harbor to expense them. This means you did NOT actually enter them as assets and they are listed only as a miscellaneous expense on your business activity.

The 'qualified improvement property' is allowed to use Section 179 because it is nonresidential property.  

• The new law under the Tax Cuts and Jobs Act (TCJA) also expands the definition of section 179 property to allow the taxpayer to elect to include the following improvements made to nonresidential real property after the date when the property was first placed in service:

  • Qualified improvement property, which means any improvement to a building’s interior.
  • TCJA New Rules for Depreciation and Expensing

@geed