Taxes, taxes, taxes – no one wants to pay them, but many businesses do. Many companies pay too much in taxes. Can you relate?
In today's episode, we will deep dive into one of the largest and, for most business owners, often the scariest tax deduction you should take – if you qualify.
Before I begin, I must provide a disclaimer – That this video is for informational purposes only. Be sure to speak with your accountant regarding how and if you can use this tax strategy for your business.
Home Office Expense
Many business owners feel that this will draw a red flag with the IRS if they take the home office deduction. I cannot say that it will or it won't.
What I can say is that if you handle this deduction correctly, you could save over $13,000 in taxes. Also, to reduce your chance of being audit or at least passing the audit, there are a few things you want to have in place when taking the home office deduction.
As a business owner, you need to have a dedicated, physical office space in your home that is used exclusively and regularly as your principal place of business.
Each year, for proof, you want to take a picture of your home office as you see here of my home office. Or have a blueprint of your home. If you use your home address as your business address, that is also considered proof.
How To Measure The Square Foot Of Your Home Office
To take the home office deduction, you want to measure your office's size and divide that square foot by the total square foot of the home. You will then use this number to determine the percentage of your home's expenses that you can write-off in your business.
Now expenses that you can write off must be directly and indirectly related to the home office. Such as painting the home office, repairs to the home, depreciation, utilities, phone line, etc. You can also deduct some of your property taxes and mortgage interest as a business expense.
Caution: DO NOT exaggerate your home office's square foot because if you do get audited, you will find yourself in trouble. If you don't want to calculate your home office's square foot, you can use the IRS simplified option.
The IRS Simplified option is when you multiply the square foot of the home office times $5. With this method, you have to cap that is 300 square foot minimum which is $1,500 total. Before using the IRS Simplified method, I recommend you speak with your accountant because even though it's easier, the square footage method could save you more in taxes.
If you use your cell phone and internet connection for personal and business reasons, you can only deduct the percentage allocable to business use. You must keep an itemized bill or other detailed records to prove the amount of business use if your return is audited.
For example, I use my cell phone. However, to reduce confusion and keep clean records, I have phone service for my business through Dailpad. I have a line for myself and everyone on my team, and it's fully tax-deductible.
Now A Few Questions To Determine If You Qualify For The Home Office
- Do you meet customers or clients at your home?
- Do you use your home to store inventory or product samples regularly?
- Do you have a separate structure of your home designated as your home office?
- Do you use your home office regularly and exclusively?
- Is 50% of your total working hours completed at your home office?
If you answered yes to any of those questions, you qualify to use the Home Office Deduction.
Now, armed with this information, leave a yes in the comments if you plan to use the Home Office Deduction.
Also, leave any questions or comments you have below, and I will answer them.
If you need assistance with filing your business and personal taxes, schedule a tax session with us today.