Shownotes
While you may be used to tracking your expenses, the home office deduction is a little more complicated (thanks IRS) than simply adding a line item to your books.
There are several rules and limitations for a home office, how much you can write off, and how to properly claim that deduction with the IRS.
If you’re self-employed or an independent contractor working from home most often and you're not leveraging the home office deduction or you’ve been adding it to your expenses but aren’t aware of the limitations, rules, and forms you need to claim it properly, this episode is for you!
01:36 — How to know if you qualify for the home office deduction, especially if you don't always work from home or in the same room
08:33 — Limitations to know about a home office deduction so you don’t create a red flag with the IRS
10:44 — The forms you need to use the home office deduction
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Transcripts
It is one of the easiest things I think to add into your expenses for your business.
Speaker:It's one of the easiest things to add in.
Speaker:Yeah.
Speaker:And I would say if you have a business that you have been receiving
Speaker:income for, and your tax accountant has not asked you about this.
Speaker:I would look for a new tax accountant.
Speaker:Welcome to the Know Your Worth Show, where we teach you how to think about
Speaker:your money differently so that you can achieve your sexy money goals.
Speaker:I'm Sydnee your money Maven and owner of Know Your Worth.
Speaker:And I'm Kristen Sid's Dimepiece bestie team member and busy mama
Speaker:twins here to make sure that those of us without a financial degree can
Speaker:still level up with each episode.
Speaker:Let's get started on reaching your next goal.
Speaker:Welcome to the Know Your Worth podcast.
Speaker:I am Sidney Conway, one of your hosts and your money maven.
Speaker:And I'm Syd's dime piece bestie, Kristen and assistant and all the things.
Speaker:And this is episode 20.
Speaker:I know, I can't believe it.
Speaker:We haven't stuck with 20 of anything.
Speaker:I know, really though, this is great.
Speaker:Like we're on a roll here.
Speaker:We are on a roll.
Speaker:Haven't missed a week.
Speaker:I And if you guys have been listening to 20 episodes in a row, thank you.
Speaker:We appreciate it.
Speaker:Go you, you're sticking with it too, getting all the tips and tricks.
Speaker:So that's exciting.
Speaker:Awesome.
Speaker:Yeah.
Speaker:Today we're going to talk about home office deductions.
Speaker:So as a business owner, as a 1099 contractor, what you can do to use your
Speaker:home office as a deduction for your taxes.
Speaker:All right.
Speaker:All right.
Speaker:Well, I have tons of questions about this, so you hit it and
Speaker:I will just interject as I do.
Speaker:All right.
Speaker:So one of the main pieces of having this home office deduction is that it's
Speaker:"exclusive and regular use" of this space in your house as your office, so it's
Speaker:used exclusively for conducting business.
Speaker:So if it's a particular room in your house, that's that
Speaker:it is used as your office.
Speaker:You can't say that it's your whole house is used just for your office.
Speaker:It has to truly be like a, a room in your house or a section of
Speaker:your house that you can measure.
Speaker:So here's my question.
Speaker:I work from home.
Speaker:I have two kids.
Speaker:I'm not in an office all the time.
Speaker:I have a room in my house that is our office, but I am working
Speaker:from the kitchen counter.
Speaker:I'm working from the sunroom.
Speaker:I'm working from their playroom.
Speaker:I'm working wherever they are.
Speaker:So, do I just call the office the deduction space, but all over the place?
Speaker:Okay.
Speaker:Yeah, that's, that's basically what it would be.
Speaker:You'd have the separate offices, like, this is our office, but, I mean, a normal
Speaker:business owner's working from a thousand different places, so as long as you
Speaker:can really say, like, this area of the house for the square footage purposes
Speaker:is exclusively office use, and you can kind of separate that and stand by that,
Speaker:yes, you can use that particular room.
Speaker:uh, You wouldn't want to say, you know.
Speaker:I work 20 percent in my kitchen and 30 percent over
Speaker:here and 40 percent over here.
Speaker:It just would probably be a red flag if you really called it out like that
Speaker:or tried to get a ton of deductions from it, given like, it might be hard.
Speaker:I'm not, you know, an IRS agent, so I don't know what they're typically
Speaker:looking for in that deduction, but you just want to make sure that
Speaker:it's something that you can stand by your reasoning and your logic for.
Speaker:So having a room, square footage specifically broken out in relation
Speaker:to the square footage of your house is the guidance that is recommended.
Speaker:Is there like a ratio that you should say?
Speaker:And so if your house is like so much square footage, like it has
Speaker:to be, like you can't say it's like, almost the whole house?
Speaker:There's a simplified option too, for, for calculating your home office.
Speaker:So if you wanted to just do all of your bills of your house by this specific area,
Speaker:so you're not able to, to say the wifi in this room is specifically for the office.
Speaker:The cable in this room is specifically for the office, the electric, the, you
Speaker:know, mortgage payment, if you can't attribute the very specific things
Speaker:to the business and you're taking percentages, you'd use the simplified
Speaker:option and that would be just taking the square footage of the office versus
Speaker:the house and then multiplying it by that percentage by all of those bills.
Speaker:So that would be the simplified option.
Speaker:And when you're calculating that you can use up to 300 square feet.
Speaker:Okay.
Speaker:Gotcha.
Speaker:Yeah.
Speaker:That's a good tip.
Speaker:Yeah.
Speaker:Yeah.
Speaker:So, and I think it's that the, the prescribed rate or the simplified rate
Speaker:is like 5 a square foot is what the very, very simplified option is for that.
Speaker:Okay.
Speaker:Yeah.
Speaker:But if you can directly attribute bills that are specifically business related,
Speaker:they're solely for that office, like if you have a way to differentiate it or
Speaker:you have two Wi Fi routers, one's for the office and say is like your business Wi
Speaker:Fi, you have like Comcast for business or something like that, and it's truly
Speaker:the business Wi Fi, then that whole piece of that would be a write off.
Speaker:Yeah.
Speaker:That makes sense.
Speaker:Yeah.
Speaker:So you do want this to be the principal place of business.
Speaker:So if you have another full blown office that you're at every single
Speaker:day, you really can't call your home office your home office.
Speaker:If you are, yes, it has to be the principal place.
Speaker:So if you're going other places to work, you would just want to be confident
Speaker:in saying like, I do work majority of the time at home or that you would be
Speaker:comfortable supporting that if you were ever to be audited, I do think it's pretty
Speaker:common that people go work in other places and then also write off their home office.
Speaker:But you, if say you're never at home and you want to write off a whole home office.
Speaker:I'd just know that you know, it's generally supposed to be for the
Speaker:principal place of your business.
Speaker:Again, like you, you're the one that has to support and be comfortable
Speaker:with what you're claiming.
Speaker:So there are lots of ways to just get deductions that doesn't always
Speaker:mean that they are applicable to you and they're right in that situation.
Speaker:So, The true IRS guideline is that it must be your principal place of
Speaker:business, the place where you meet your patients, your clients, your customers
Speaker:in the normal course of your business.
Speaker:Or it can be a separate structure not attached to your home, you
Speaker:know, say you used your garage for your business or you used a, you
Speaker:know, a structure on your property.
Speaker:You can claim that whole thing.
Speaker:But it's typically supposed to be where the primary place
Speaker:of business is conducted.
Speaker:So I have a Maverick membership and I come here, well I used to
Speaker:come here all the time to work but now I don't get to anymore.
Speaker:So that wouldn't be a flag because I have the membership and it's an option
Speaker:but it's not where I come all the time.
Speaker:Right.
Speaker:And I think co working spaces are a little bit different too because it's,
Speaker:it's just a membership to a space.
Speaker:The business isn't paying for the utilities.
Speaker:The business isn't paying for the Wi Fi.
Speaker:You know, you're just paying a membership to belong somewhere else.
Speaker:It would be similar to joining a networking group that gave you access
Speaker:to a space or something like that.
Speaker:So if you're going and bouncing around and meet new people or have
Speaker:somewhere else to work, that's not considered your full time office.
Speaker:You would just have like a membership there.
Speaker:So your full time office can still be at your house, your primary place, but you
Speaker:can still have, you know, memberships to pop in different places to work, that
Speaker:would be like saying you couldn't go to Starbucks and pay 5 for, you know, 25 a
Speaker:day if you're getting coffee and food.
Speaker:And that's the same thing as getting like a day pass to a co working
Speaker:space or something like that.
Speaker:Uh, So the simplified option was just kind of taking that 5 a
Speaker:square foot up to 300 square feet.
Speaker:The regular method is where you would go through and you would calculate
Speaker:all of these different items.
Speaker:So it would include your mortgage interest, your insurance, utilities,
Speaker:repairs, and depreciation.
Speaker:And then it would also include any of the furniture that's actually in that.
Speaker:And that's where some of that depreciation would be considered as well.
Speaker:So say you bought a, you know, a massive desktop and that might be
Speaker:something that's an asset on your books because it's a company property, but
Speaker:the depreciation of that home office and the furniture in there would also
Speaker:be a typical business expense, too.
Speaker:When do you use the simplified option and when do you use the regular method?
Speaker:Is that something your tax accountant does?
Speaker:You would do that.
Speaker:You would have to prepare that.
Speaker:And I would say you would want to do whichever one probably gets you more.
Speaker:Mm hmm.
Speaker:So if you know that you really don't have a lot of expenses or you don't
Speaker:calculate it like you don't keep track of it at the end of the year.
Speaker:You can do the simplified method, but if you're somebody, it would be like your
Speaker:standard deduction versus saving all the receipts, you know, for tax time.
Speaker:You know, you can get the standard deduction or you
Speaker:can save all the receipts.
Speaker:You can calculate it all yourself and you can get more, but you have
Speaker:to have all the support for it.
Speaker:So, for the regular method, you would just have to have all the
Speaker:support for it, where the simplified method, you don't necessarily have
Speaker:to have all the support for it.
Speaker:Mm hmm.
Speaker:Okay.
Speaker:That's interesting.
Speaker:Mm hmm.
Speaker:Mm hmm.
Speaker:There are some limitations to this.
Speaker:Obviously.
Speaker:Yes.
Speaker:Exactly.
Speaker:So the limitations are that the home office deduction that you take cannot
Speaker:exceed the gross income from the business minus your home business expenses.
Speaker:Okay.
Speaker:So your business, you can't put yourself into a net loss just
Speaker:by adding your home office.
Speaker:Okay.
Speaker:It would only up, be up to the point.
Speaker:of you showing a loss.
Speaker:You couldn't put yourself into the negative with your home
Speaker:business expense and then say, Oh, I don't owe any money on taxes.
Speaker:It would be that it would, it would reduce your tax liability, but it
Speaker:can't throw you into the, the negative.
Speaker:Gotcha.
Speaker:Yeah, it can only reduce to basically zero.
Speaker:So, say you were showing net income in the books of, you know, we're just
Speaker:gonna use easy small numbers, 100.
Speaker:And your home office is 105.
Speaker:You wouldn't show them a negative five, you would just show zero.
Speaker:Gotcha.
Speaker:You'd only be able to write off the amount that would get you to that.
Speaker:I mean, that seems logical.
Speaker:A lot of the stuff that you explained that the government
Speaker:wants does not seem logical to me.
Speaker:Like sales taxes.
Speaker:Yup.
Speaker:This seems logical.
Speaker:Yeah.
Speaker:I'm still stuck on sales taxes.
Speaker:Yeah.
Speaker:Anyway.
Speaker:Well, sales taxes are tough.
Speaker:A lot of people are stuck on those all the time.
Speaker:Yeah.
Speaker:Yeah.
Speaker:That episode blew my mind.
Speaker:All right.
Speaker:Go ahead.
Speaker:You definitely want to make sure that you keep good records for this.
Speaker:Keep your detailed expenses.
Speaker:What you're using for your home so that you can calculate everything
Speaker:accurately and also for the IRS audit, if that, would ever happen to you,
Speaker:you want to have all those records and all those receipts available.
Speaker:Luckily, a lot of our home office stuff is digital at this point.
Speaker:So it's very easy to pull up what your mortgage interest was for the year.
Speaker:It's very easy to pull up what your utilities for the year were but having
Speaker:that calculation saved so where you would add everything up, maybe in an
Speaker:Excel spreadsheet so that you have that.
Speaker:Know Your Worth has a home office deduction calculator that we can send you.
Speaker:Oh, awesome.
Speaker:If you're interested.
Speaker:Of course.
Speaker:We do.
Speaker:We have that available.
Speaker:It's one of the first templates that I built out, actually.
Speaker:So all you have to do is go through your personal expenses
Speaker:and kind of fill everything in.
Speaker:It'll total it all up.
Speaker:You put in the square footage of your office, the square footage
Speaker:of your house, and it'll tell you what the deduction is for that.
Speaker:Super awesome.
Speaker:Yeah, that's awesome.
Speaker:Well, I have a question.
Speaker:There's like special forms that go with like everything that we talk about.
Speaker:Yeah.
Speaker:Is there a form that goes with this?
Speaker:Yes.
Speaker:So form 8829, if you are using the regular method, yes, the 8829, if
Speaker:you're using the regular method expenses related to the business use of your
Speaker:home are calculated on this form.
Speaker:So, and it's filed with your form 1040 at the end of the year.
Speaker:You're a genius.
Speaker:Well, Google helps me a lot too.
Speaker:So, you know, your, your tax professionals and your CPA is, and you're all
Speaker:of your licensed professionals and any of your professional services,
Speaker:people are Googling things too.
Speaker:We just, we just know where to Google, but and what resources to look at.
Speaker:But yeah, it's it's difficult to go through all the forms and.
Speaker:Things that are required.
Speaker:So leave it to us.
Speaker:We'll figure it out and we'll get back to you on it.
Speaker:Well, I have another question because now that I've learned about different
Speaker:state requirements, is this different in every state or is it the same at all?
Speaker:Some states are different, yes.
Speaker:Of course they are!
Speaker:Some states are different.
Speaker:You always want to be aware of your specific state and the
Speaker:requirements that they have.
Speaker:So always go onto your state website.
Speaker:Just do a quick Google.
Speaker:So that is the gist of the home office deductions.
Speaker:It is one of the easiest things I think to add into your expenses for your business.
Speaker:It's one of the easiest things to add in.
Speaker:Yeah.
Speaker:And I would say if you have a business that you have been receiving
Speaker:income for, and your tax accountant has not asked you about this.
Speaker:I would look for a new tax accountant.
Speaker:Yeah.
Speaker:I, uh, I would say, you know, you want a tax accountant and a bookkeeper,
Speaker:but the tax accounts, the one that's actually filing the main things.
Speaker:So from a bookkeeping perspective, this won't be something that I
Speaker:would add into your business books.
Speaker:This is something that you add in after.
Speaker:Yes.
Speaker:It's on the personal, not on the business.
Speaker:And so with this, you would just want this to be kind of an added in line
Speaker:item on your personal tax return, so it's not necessarily you know, a
Speaker:journal entry in your business books.
Speaker:It's on, it's kind of on the back end.
Speaker:Which to me doesn't make sense because it's a business thing,
Speaker:but why is it on your personal?
Speaker:Right.
Speaker:It's just another reason why we need professionals in our lives.
Speaker:Right, right, absolutely.
Speaker:Because if I did your taxes, it'd be like a purple crayon.
Speaker:It's like my kid's calculator.
Speaker:Yup, yup, yup.
Speaker:No, I I mean, it, it's, it is weird.
Speaker:There's a lot of information that you need to know.
Speaker:There's a lot of information that you need to know.
Speaker:And if your tax professionals are not guiding you, you really
Speaker:should look and see, are you, are you losing out in deductions and,
Speaker:and getting these write offs?
Speaker:Are you losing out on this money?
Speaker:And if you're trying to go the cheap route, if you're somebody that's, and
Speaker:even some of the times when you file by yourself, like TurboTax, they kind of walk
Speaker:through, like, do you have a home office?
Speaker:Do you work primarily from home?
Speaker:Like they do give you good prompts to go through that.
Speaker:You might not know how to collect that data on your own.
Speaker:So if you're filing yourself or you're going through TurboTax or something like
Speaker:that, we went through TurboTax for a long time before having multiple businesses.
Speaker:It's just so much.
Speaker:I feel so much better about going to a tax professional that
Speaker:can give me some more insight.
Speaker:But if they're not helping you kind of raise flags on where you
Speaker:should be focusing your attention on what other deductions you can get,
Speaker:you might want to look somewhere else because they should, that's
Speaker:something that they should be helping.
Speaker:Yeah.
Speaker:They should be helping you with.
Speaker:And I do think that there's a lot of tax professionals out there
Speaker:that come time come tax season.
Speaker:They're overwhelmed and they can't help you at the end of the year.
Speaker:So it's something where you want to be having conversations with your tax
Speaker:professional throughout the year so that you can be making sure that you
Speaker:have all these deductions lined up.
Speaker:That's a good point too.
Speaker:Yeah.
Speaker:So get in front of your tax accountants, get all your receipts.
Speaker:Figure out all your stuff.
Speaker:If you need the Excel breakout, we can send that over to you.
Speaker:And again, those, this typically would be on the back end.
Speaker:So if you're not having this conversation with your bookkeeper, that's normal.
Speaker:You can always ask your bookkeeper.
Speaker:If you ask, if one of my clients asked me a question like this, I would direct
Speaker:them to the spreadsheet that we have.
Speaker:And I would give them some guidance on what to put, but I'm not
Speaker:the one that would actually be filing this information for them.
Speaker:Yeah.
Speaker:Great tips, Syd.
Speaker:Yeah.
Speaker:Yeah.
Speaker:So home office is a good one.
Speaker:It's a big one.
Speaker:If you're independent contractor, self employed or have your own business,
Speaker:you should absolutely look at getting your home office deductions in order.
Speaker:Boom.
Speaker:Yeah.
Speaker:Absolutely.
Speaker:So this was a quick one.
Speaker:Yeah.
Speaker:Yeah.
Speaker:I like our little bite sized ones.
Speaker:Yeah.
Speaker:Little helpful tips.
Speaker:Yeah.
Speaker:Tidbits here and there.
Speaker:Business owners are busy, so.
Speaker:Mm hmm.
Speaker:Banging it out.
Speaker:Absolutely.
Speaker:Absolutely.
Speaker:Well, enjoy.
Speaker:Let us know if you have any other questions on home office deductions,
Speaker:and we can take it from there.
Speaker:Yeah.
Speaker:See you next week.
Speaker:Bye, guys.
