Working From Home

Schedule C depreciation expense deduction recalculated

Operating a Schedule C business offers some tax benefits when it comes to deducting expenses normally considered personal. It can provide an exception for deducting personal living expenses of a taxpayer’s home as long as it is the taxpayer’s principal place of business and used to meet customers, clients or patients dealing with the taxpayer’s normal course of business.

Depreciation is allowed or allowable for business-use property (i.e., the normal wear and tear of such property placed in service). To claim depreciation, taxpayers must establish a cost basis. The allocation should be based on the percentage or square footage that pertains to the business use. The allocation should be reasonable and supported. When a personal residence is used for business, the depreciable basis is the lesser of the adjusted basis, including improvements or the fair market value (FMV) on the date of conversion.

For Rodrigo and Loreta Kho, the square footage and percentage of cost basis allocated toward depreciation was questioned. The IRS redetermined the correct allocation based on submitted documentation. The couple, who provides foster care to two adult individuals, could not support their original allocation for the business use of their home. They filed Schedule C for 2012 and 2013, with a depreciation deduction of $7,465 and $7,788. They were able to support the claim of two bedrooms and an additional bathroom used exclusively and regularly in their foster care business. The taxpayers provided support for renovations done in 2008 for the additional rooms at a cost of $125,000. From documentation submitted during the review process, the additions represented 70% of the total square footage added during the renovations, or 402.5 total square feet. The total square footage of the home was approximately 1,665
square feet, which meant the business use was about 25% of the total home. There is an allowed deduction as a reasonable allowance for the exhaustion and wear and tear of property used in a trade or business. Basis for this depreciation deduction is the cost of the property.