Taxing Questions by David Zubler
If you have a business office in your home, you may have missed some tax deductions. Like many people, you may not be aware of these deductions and failed to have claimed them.
When you begin to claim a business office in the home, you are likely to have some former personal assets that you begin to use for business.
If you have assets that you previously purchased for your personal use and are converting to business use, you will need to determine the asset basis in order to correctly depreciate it.
To determine the asset basis to use for depreciation, use the lesser of fair market value on the date of conversion from personal to business use, or adjusted basis of the property (generally the amount you paid for the asset plus the cost of any improvements).
The fair market value is the price at which the property would sell for under normal conditions when the buyer and seller both have reasonable knowledge of the relevant facts.
As an example, if you bought a new desk for $1,000 and used it for personal use before converting it to business use, you would need to reduce its basis to its fair market value when depreciating it. If its fair market value was $800 when you began to use it for business purposes, its basis for depreciation would be $800.
If you inherit valuable antique furniture, its value would not normally decrease. Fortunately, the IRS will allow the value when you inherit it as its basis for depreciation. As an example, if you inherited an antique desk that was worth $10,000, the IRS would allow the entire $10,000 since the value of an antique doesn’t normally decline.
Certain assets can be fully deducted in the year of purchase rather than depreciating it over its useful life.
Normally you have the option to fully expense an asset in the year it was used by claiming it as a Section 179; however, unlike assets directly purchased for your business, you may not use Section 179 to immediately expense assets that you convert from personal to business use.
Fortunately, you can take advantage of bonus depreciation rules since you can’t take advantage of the Section 179. Bonus depreciation is a tax incentive that allows a business to immediately deduct a large amount of the purchase price of eligible assets, rather than write them off over the “useful life” of that asset.
Generally, the bonus depreciation rules require you to deduct the full amount of the asset unless you make a formal election in your tax return to elect out of bonus depreciation.
If you buy bonus depreciation qualified property for personal use after September 27, 2017, and convert it to business use in the current year (or anytime before 2027), you must use 100% bonus depreciation if you don’t elect out of it.
David Zubler is a tax accountant in East Tennessee, author of four tax books, and a philanthropist. Proceeds from the books go to a charitable foundation he created for underprivileged children. He is founder of Your Tax Care, which provides tax education and rescues people with IRS problems. David can be reached for questions and consultation at yourtaxcare.com.