Secret Tax Expenses of a Home Office

Setting up a home office can be a valuable strategy for tax savings. The ability to write off your utilities, insurance, repairs and other costs as they relate to your home office helps defray the cost of home ownership. Shifting a portion of your mortgage interest and property tax to your home office can let you double count your home deductions against your income and self-employment tax. However, home offices also carry some tax expenses that small business owners don't always think about.

Employees

When employees work in your home, they're still employees. Just because you have a home office instead of an off-site location doesn't mean that you're exempt from any of the laws that govern employer-employee relationships. Your responsibilities include providing a safe workplace, following wage and hour laws and withholding taxes. While you might need the help of an insurer or attorney for many human resources issues, employment tax providers like ADP.com can handle your payroll and tax withholding for you.

Depreciation Recapture

Part of the package of deductions that you get with a home office is the ability to write off a portion of your home's value as depreciation. This is an accounting tool that reduces your taxable income even though you don't spend anything out of pocket. However, it can come back to bite you when you least expect it.

When you sell your house, the IRS looks at the value you achieve. If it's more than the amount that you depreciated, you'll have to pay that depreciation back. This special tax, called depreciation recapture tax, will require you to pay 25 percent of all of the depreciation that you claimed on your house if you sell your house for more than the depreciated value.

There's no way out of it. Even if you don't claim depreciation, the IRS will still levy the tax. It isn't based on the depreciation you claimed. It's based on the depreciation that you legally could have claimed, whether or not you actually did.

Audit Defense

Historically, home offices have been a major trigger for tax audits. The IRS usually looks carefully at tax returns from small businesses in general. Given that many taxpayers attempt to claim home office deductions that they don't deserve, the deduction can be a target. This doesn't mean that you shouldn't claim it if you're entitled to it, though. It just means that you may need to prove your right to it in an audit.