Angela Sanderson (not her real name) has been breeding and selling Paso Finos for five years. Her ranch and breeding operations are small–three mares on five acres. Although Sanderson considers herself a savvy business woman, the California breeder lost money two out of the last three years. In her effort to improve her bottom line, Sanderson is making changes on how she manages her business. One change she is considering is claiming a home-office deduction against her taxes.
According to J. K. Lasser’s Your Income Tax 1995, Your Guide to New Tax Changes, Macmillian, USA, 1995, claiming a home-office deduction might allow Sanderson to deduct expenses related to the office. Depending on her income, Sanderson’s home-office deductions could include a portion of her mortgage interest, real estate taxes, insurance, utilities, repairs, and depreciation proportional to the area of the house used for business. Thus, if Sanderson’s office takes up 10% of her home, she may deduct 10% of the cost of maintenance fees, i.e., painting the outside of the house or repairing a roof. However, household repairs and expenses that do not benefit the office space are not deductible, i.e., costs of lawn care and landscaping. She can also deduct 10% for depreciation, however, there will be consequences (tax ramifications) when she sells her home which will need to be calculated by an accountant or tax specialist.
"Deductions for the business portion of utilities, maintenance, insurance cost, etc., may not exceed net income derived from the office’s use," Lasser’s book states. "If you do not realize income during the year, no deduction is allowed."