How do you determine the depreciation basis for a separate structure home office?

Pub 587 says you can deduct expenses for a separate free-standing structure if you use it exclusively and regularly for business. We're looking at a 10x10 unit. Based on size, the structure does not require city permits and is not included in the overall property appraisal value. How would you calculate the depreciation expense and portion of utilities on the Worksheet to Figure the Deduction for Business Use of Your Home?

For example -
Home is 900 sq ft and Seperate structure office is 100 sq ft
Home original cost 300,000 (Land = 200K, Bldg = 100K)
Separate structure original cost = 10,000

Method A: Office space is 10% of total square footage. Total basis is 100K + 10K = 110K. Depreciation basis for structure is 10% or 11,000.

Method B: Original cost of separate structure used for depreciation basis 10,000

If using Method B, would you still use 10% square footage to determine indirect expenses like utilities? Can you include mortgage interest and property tax?

Since it is a separate structure, there is no reason to relate it to the size of the house. Land does not depreciate, so the lot price is irrelevant. You should depreciate the $10,000 cost over the useful life of the structure.

It appears that the mortgage does not apply to the new structure since the mortgage must already exist on the house and land. If you finance the structure cost, the interest would be deductible. Property tax would be deductible to the extent it increases as a result of adding the structure. However, the IRS would probably not question some portion of property tax applied to the structure.

You could estimate utilities on the basis of square feet being realistic. For example if you don't have a bathroom in the structure, applying 10 percent of the water bill would be inappropriate. On the other hand, applying more than 10 percent of the electric bill might be reasonable if you have a lot of equipment, such as computers, refrig, electric heater in the structure. the important thing is to be realistic. And to the extent that your insurance covers both buildings, a portion should be applied to the office structure.

using method b you would take percent of cost $, not % of square foot

$10k / $110k is about 9.09%

method A you got the right answer but im not sure if you said it correctly.
using sq ft you get 10% as follows

100sq ft / 1000 total sq ft = 10%

method A seems higher and better for you