Tax Question & Answer : Home Offices And Capital Improvements

Kelly Phillips Erb "the tax girl" for Forbes writes: Taxpayer asks:  I’m confused.  Both my wife and I have home offices, each using about 5% of the total home square footage. Last year, we replaced the both the hot water heater and the washer/drier.

For the hot water heater, I think it’s very clear, that improvement directly impacts our home office use, so I have no issues with claiming deductions for those costs. I work from home 40+ hrs/wk and expect to be able to wash my hands after using the bathroom.

However, we also replaced the washer & dryer, at a cost of $2k+. My first thought is that this is unrelated to our respective businesses; this is really for personal use. I mean, whether or not I had a home office, I am not allowed to deduct expenses for dry-cleaning my suit, right? So why should I be able to deduct my new washer/dryer (or 10% of it in my case) ?? Yet this is clearly a ‘capital improvement’ on the whole house. But is it deductible since it’s a capital improvement on the home?

Taxgirl answers:

This is a great question! You hit a number of points.

It’s true that when figuring the amount you can deduct for the business use of your home, you can include expenses attributable solely to the portion of the home used in your business. So, for example, if you install a separate entrance for your clients, that would be fully deductible as a business expense.

You’re also right that the amount you can deduct for expenses attributable to the whole house depends on the percentage of your home used for business. In your case, you figure 5% for each of you and your wife, for a total of 10%. You would apply this percentage (10%) to the total of each expense, including real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs. You may not deduct expenses for lawn care in general or for painting a room not used for business.

You can also deduct, as you pointed out, the pro-rated cost of certain capital improvements. But the confusion seems to be what that means. The IRS likes to use the term “permanent improvement” as their description.

What you’ve described – adding a washer & dryer – is a personal expense and not a capital improvement. It doesn’t permanently improve the home. I like to explain it like this: you can only deduct things you cannot (or would not) remove from the house. That would include electric wiring or plumbing, a new roof, an addition, or paneling. That would also include the hot water heater. It wouldn’t include the washer & the dryer because you can take those out pretty easily. It also wouldn’t include a new fridge, furniture and the like. Those remain personal expenses and are only deductible if restricted to business use.

I hope that clears up the confusion.