Working at Home? Don’t Overlook These Deductions

Whether you claim a business office in the home or are
simply working at home, say because of COVID-19, you likely have some former
personal assets that you now use for business.

Ah, new tax deductions!

Yep. Say you don’t claim a home-office deduction but
now you are working at home and sitting in the fancy chair you inherited from
your grandmother.

Let’s say you use the fancy chair 85 percent for business
purposes. Can you depreciate 85 percent of that chair?

Yes.

Let’s say that grandma’s estate was appraised and this chair
had a value of $10,000 when you inherited it about a year ago. It’s an antique,
so it’s not gone down in value since you inherited it.

Depreciating a Formerly Personal Asset

When you convert the fancy chair to 85 percent business use,
the law sees you as placing the item in service in your business at that time.
That means you can begin depreciating the asset and claiming your tax
deductions.

To determine the 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).

With the fancy chair, your adjusted basis is the inherited
value.

But say you bought the chair for $8,000. Suppose it was
worth $10,000 when you converted it to personal use. You would use the $8,000
figure to determine your depreciation deductions.

Bonus Depreciation and Section 179 Expensing

Unfortunately, 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.

Bonus Depreciation Is a Different
Story

If you acquire bonus depreciation qualified property for
personal use after September 27, 2017, and convert it to business use this year
(or anytime before 2027), you must use 100 percent bonus depreciation if you
don’t elect out of it.

Example. You purchased an antique clock for $9,300 in
January 2018. Yesterday, you placed the clock in business service by moving the
clock from your entryway to your home office. If you don’t make a formal
election in your tax return to elect out of bonus depreciation, you must claim
a $9,300 depreciation deduction on the antique clock this year.

Basis When You Sell

There’s a trick to basis when you sell converted
property—you use a different rule for calculating losses than you do for
calculating gains:

• Losses. To calculate losses, use your adjusted
  basis (conversion basis as discussed above minus depreciation).
• Gains. To calculate gains, use original cost basis
  minus post-conversion depreciation. In most cases, original cost gives you
  a higher basis and thus less tax. So don’t accidentally use adjusted
  basis.

Note. For inherited assets, your cost basis is the
estate value (generally, the date of death value).

Clarifying Examples

Let’s say you bought a personal use desk/credenza/bookcase
set for $8,000 and then converted it to business use when its fair market
value had fallen to $6,000. Here are the tax consequences for three different
sales scenarios (to make the examples clear, we ignored depreciation):

• Loss. If you sell the desk/credenza/bookcase set for
  $4,000, you have a $2,000 deductible loss ($6,000 – $4,000). Note. This
  is much better than if you sold the desk/credenza/bookcase set as a
  personal asset, which would create a zero deductible loss.
• Gain. If you sell the desk/credenza/bookcase set for
  $10,000, you have a $2,000 gain ($10,000 – $8,000).
• Gray area. If you sell the set for $7,000, you have
  neither gain nor loss on the sale. That’s a decent result—it means no
  taxes for you (but no deductible losses either).

If you have personal assets that you now use for business
and want to make them tax deductible, call me on my direct line (408-778-9651)
and we’ll implement a plan for those new deductions.