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Wealthy & Wise: Write Off Your Home Office

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May 12, 2023
Author: NCH

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About the Video: Wealthy & Wise: Write Off Your Home Office

Writing off a home office offers several advantages for individuals who work from home. Firstly, it provides a valuable tax deduction, allowing individuals to reduce their taxable income and potentially lower their overall tax liability. This can result in significant savings, particularly for those with dedicated home office spaces used exclusively for work purposes. Secondly, writing off a home office allows for the reimbursement of certain expenses associated with the workspace, such as rent, mortgage interest, utilities, and even home maintenance costs.

Prefer to read? A full transcript is provided below.

Cort:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie. And today we’re going to be talking about home office deductions. Actually taking advantage of the fact that so many Americans are working at home but gaining some tax benefits from your home office. And I brought in an expert today to work with us and break this down and really simplify it. We have Adam Kintigh, one of our business consultants here at NCH to help us understand it. Adam, how are you today?

Adam:

Doing great, thank you.

Cort:

Thank you for being on the program. And many of these folks already listen to you religiously every week. So, we all know that you’re an expert. Let’s talk about home office deductions. I know there’s a lot of people that are uncertain about how it works. People have heard of it, but they don’t know how to apply it properly. What can you tell us about home office deductions?

Adam:

Yeah. So, the first thing is, if you have an office in your home, we need to calculate what is the square footage of your home office compared to the square footage of your home. And if that comes out to be 10%, your company, you get to write off 10% of the monthly payment and 10% of utilities, electric, gas, water, sewer. So, there’s actually, the IRS website has a really good breakdown. There’s two ways you can do it. One, I could do a home office and the percentage, the actual method using the square footage. Or, we can do what’s called the safe harbor rule, which is $5 per square foot up to 300 square feet. That is a little bit better if you’re going to do this personally, write it off on your home office that way.

Cort:

Is there a choice like who gets to decide which one to use?

Adam:

Yet you get to decide which one you use. And one of the big challenges we have is, you always hear about all these red flags that cause audits. Well, one of my clients is an IRS auditor, and she said the two things she looks for is Schedule C and the Home Office. She said they’re both heavily abused and technically, if I’m writing off the actual method that goes on a schedule C where I’m writing off the square footage of my home and it’s again red flagged. The IRS wants to see an actual office with office furniture only if they see a futon or a day bed, not a home office. They go so far to see if there is clothing in the closet. Not a home office. So, the second method, the safe harbor rule. There is no, it’s not on your schedule C, It’s on schedule A. So there’s no red flag. If you write it off on the schedule C, eventually you sell your house, depreciation recapture, you have to pay back what you’ve written off. To the Safe Harbor method, Schedule A, no depreciation recapture, no red flag, the easy way to do it, but it’s only $5 per square foot up to three hundred square feet. So, if you’re looking for the bigger, and be able to write that off, if you have an LLC taxed as an S corp, that’s the best route to go.

Cort:

Okay. And so, what do you do if you’re one of our C corp clients or somebody that wants to be taxed as a C corporation and they have an LLC, is there a way for them to get around it?

Adam:

Yeah. So, C corp and S corp can both write these things off. Okay, but it’s different. It’s not reporting on your personal return. It is, the company is reimbursing you, but CPAs don’t refer to it as a home office at that point, they say it is an office, office reimbursement. So, it’s really important. I was talking with a CPA last week and I said all my clients love to write off their home office. And he said, yeah, but as an S corporation, they can’t do a home office. So, we got a little argument about, okay, well you understand what they’re trying to do? He said, yeah, but legally I’ve got to say office. I can’t calculate home office. It’s got to be office, so interesting.

Cort:

So, the advantages aren’t the same between those two types. And you know, if you think about it, in the Safe Harbor method, you’ve got what, an average probably home office of a room that might be 10 by 15, maybe at the most? A typical, I don’t know what a typical bedroom size is, but that’s, you know, only about 150 square feet. So, then you get, what, $750 that you can actually deduct every month? Is that what it would be?

Adam:

That’s per year.

Cort:

Per year.

Adam:

So, it’s $5 per square foot.

Cort:

Okay.

Adam:

Up to 300 square feet. That’s per year. So, if you’re doing a percentage of the monthly payment and your utilities, obviously it’s bigger, it’s worth more, what you’re doing with the actual.

Cort:

Significantly different, that Home office deduction versus that safe harbor home office deduction. Much more dramatic. And obviously, that’s where everybody wants to focus if they ultimately can. But you’re saying, you know, as far as the way the IRS looks at it, they don’t spend a lot of time on the safe harbor side?

Adam:

Correct. It is no red flag doing the safe harbor, no depreciation recapture, but also a little, little tiny bit that it might help you out, which makes you question why am I even doing the Home Office if I’m only getting that little maximum of 1,500 dollars as a tax deduction? So, one of the things that is interesting is if you are a person like a real estate agent or you travel for your business, if you do not have a home office, your first trip in the morning, you can’t write that off. They consider it a commute. So, if I got a phone call and I had to go clean carpets for somebody and I get in my car and drive to the home that I’m cleaning the carpets for, I can write that off unless I have a home office. That would be considered a commute. I turn around, go back, that’s a commute. If I have a home office now, all my mileage becomes deductible for business purpose.

Cort:

Even under the safe harbor methodology?

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Adam:

Even under the safe harbor.

Cort:

It’s not as beneficial Tax wise, however, you get to still take advantage of driving and commuting. Interesting.

Adam:

So, and one of the pieces I was reading some court cases on home office deduction, and even for many of you, if you have inventory in your home that you have to store inventory, you should keep track of the space that’s used for that. We were going through, one of my clients has converted a garage into his beautiful studio and they’re thinking, okay, can I write that off? And yes, you can. Not only this garage that they converted into a studio, but all of the work that went into creating the studio with the lights and that the special sound deadening equipment, all of those things that with this beautiful studio, all those things could be written off as a small business owner.

Cort:

And I think of the contractors that are out there, you know someone that’s more independent, they’re not, they don’t have a big business, but they have themselves, a handyman service, a painter, somebody that just might come into a house and do the work. They’re going to have a vehicle, they’re going to have a truck. They’re going to have storage space, like you mentioned, in a garage. It’s going to have materials, equipment, things that they’re having to hang on to. So how does it work in that case when you’re parking a vehicle, for instance, in a garage, it’s taking up a significant portion of a garage?

Adam:

If it is, the IRS rules are, if it is for exclusive use for the business, you get to write it off. So, if you have a work truck that you have to park in that garage that is exclusively for a business truck, you get to write off that space of your garage.

Cort:

So, the storage like your studio example of using part of your garage, but your truck, your storage space, your shelving, any equipment that you have just adds to that. So, you get to continue to keep writing off more and more as time goes on.

Adam:

Correct. And the thing I work with, every situation is unique and different. So, it’s one of those things if you don’t talk to your CPA about this, you’re never going to know. And every CPA that I have ever worked with always says, I would rather you keep track of too much than not enough. Let the CPAs tell us, are we being too aggressive with the Home Office or the studio? Do we hear back it out? There’s rules that have to be followed that our CPAs have to follow. But if you don’t present the information, they’re not going to know that you have the Home Office or you have the space you’re using at your house for storing inventory, equipment, etc..

Cort:

Yeah, and it’s important that you take advantage of these tax deductions. That’s the other thing that I think so many people don’t have the conversation, as you mentioned, with the CPA to elicit these things and get to things that are actually going to help you reduce the amount of taxes that you pay. And, you know, at the end of the day, it’s your money. You’re the one that’s earning the income. You’re the one that has the right to every tax write-off that’s humanly available, that’s legally available to you. And you should take it. You know, it’s not to stretch. It’s not to misrepresent, but it’s to take every tax deduction that’s afforded to you.

Adam:

It’s knowing what you can and can’t do are important. But these conversations have to be had with your CPA, based on your situation, how much money you’re making or not making. These are all things that come into your overall tax bill, maybe a little bit, but all these little things add up. The 65 and a half cents a mile, the Home Office deduction, the meals, all these things start adding up. And then you step back at the end of the year and you look at the difference between having a good CPA that knows and understands what you can and can’t do and having, you know, a chain tax preparer that really has little or no training on things you can write off as a business owner. So, really important have those conversations with your CPA throughout the year.

Cort:

Makes sense. Makes sense. So, you know, I think you’ve helped explain some of the nuances of the Home Office deduction and especially, you know, the way that it has to be correctly labeled and accounted for between a C or an S, the type of business structure that you have that’s very important. And then many people don’t know about the safe harbor rule that’s out there. And so, you know, that might fit you if you want a simpler approach to deducting a portion of your house. But I think, you know, generally speaking, it’s best to use the square footage model to get the maximum deduction on your taxes. And then to remember that if I’ve got a vehicle, that’s also part of your garage. And if you’re storing things wherever that is, have also factored into that square footage calculation that you have. And then that gets attributed to, as you mentioned, what, electric, water, sewer, gas, cable, Internet, all of the above.

Adam:

And we just got a notice here in Nevada, 17% increase in power. So, all these things start adding up. Yes.

Cort:

And especially when you consider how much, you know, we all pay in taxes and many of us that live outside of Nevada, like many of you followers here, you’re paying state income taxes. If you live in L.A. and New York, you’re paying city income taxes or San Francisco as well. And then you’ve had federal income taxes. And there’s a lot of people that are sitting out there right now listening that are paying over 50% of every dollar that they earn in taxes. And so anything that you can do to kind of chip away at how much tax you have to pay puts money back in your pocket. You’re the one that works for this. You’re the one that works very hard to earn the income that you have. So, you should take advantage of every tax deduction that you possibly can.

Adam:

Absolutely. Agree with that.

Cort:

Fantastic. Well, Adam, thanks for being on the program today and enlightening us on the Home Office deduction opportunities that many of our listeners want to understand better.

Adam:

Thanks for having me.

Cort:

Absolutely. All right. For those of you that are tuned into our program today, please be sure to like and subscribe. That’s very important to us. And so, I’d appreciate the support. And thanks for tuning in to another edition of Wealthy and Wise. I’m your host, Cort Christie. Have a great day!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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