Tax Write Off Guide for Home Office Deductions & Expenses
If you run a business out of your home, you can attempt to reduce the amount of self-employment tax you’ll pay by calculating the business use of your home. As long as you’ve had a net profit on your business, you can take advantage of home office deductions.
Schedule C Tax Payers
If you receive 1099 income, operate a business using your social security number, are a sole proprietor, or are a single-member LLC that has not elected another method of taxation, then you file a Schedule C, Profit or Loss From Business, tax form along with your 1040.
What Is Form 8829?
If you run this business out of your home, you may also be familiar with Form 8829, Expenses for Business Use of Your Home. This form starts with the square footage of your dedicated home office space. It compares that to your total home square footage to determine the percentage of your home used exclusively and regularly for business or to store inventory.
Note: This form is only for self-employed individuals. Owing to the Tax Cuts and Jobs Act (TCJA) that took effect in 2018, employees cannot deduct home office expenses.
Form 8829 then takes into account both direct and indirect home office expenses. The former category includes things that are 100% deductible, such as a new desk chair. The latter category takes the above-calculated percentage of your home used exclusively and regularly for business against whole home expenses such as home insurance, rent or mortgage interest, cleaning services, and utilities.
How To Fill Out Form 8829
When filling out the direct and indirect columns on the form, put the full amount of the expense (personal and business). On what is currently line 24, you will take the indirect expense total and multiply it by the percentage of your home used exclusively and regularly for business to figure out the deductible amount.
S Corporations & Home Office Expenses
S Corporations are single- or multi-member LLCs that have chosen to be taxed as an S Corporation. Because of this change in taxation, a couple of things change.
What Is Form 1120S
First, the business owner no longer uses Schedule C. Instead, the business itself now files Form 1120S. Secondly, the owner(s) of the corporation is considered an employee shareholder. Because of the TCJA, employee business expense deductions are not allowed, so another method to capture home business expenses is needed.
An Accountability Plan is the method S Corp owners should employ to take a deduction of their home office expenses. Under this structure, the owner would submit a reimbursement request to the business, and the business would reimburse the owner. The cost then becomes a deductible expense of the company, and the payment to the owner does not need to be counted as personal income.
Specific amounts should be reimbursed. There are many digital solutions to manage this paper-free. Otherwise, the owner should fill out a form listing the type of expense and the amount and put the corresponding receipt with the form and provide the form to the company.
The same concept relating to direct and indirect expenses applies here. Direct costs are 100% deductible. For example, if you buy copy paper for the business or have to repair your home office space. Indirect expenses are once again reimbursed based on a business use percentage.
If your office is 150 square feet and your home 2500 square feet, you will get a 6% (150/2500) reimbursement on indirect expenses such as property tax, home insurance, utilities, repairs to any area of the house, etc…
Depreciation on your home should also be included. Take the purchase price of your home divided by 39 (years) and multiply that by, in this example, 6%.
This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, or accounting advisor for specific advice about your situation before engaging in any transaction.
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If you haven’t been following the above procedures and need help adjusting your home tax deductions please give us a call! We’re here to help. Right now we’re offering FREE consultations to new callers. For help with this or any other accounting matters, reach out to us at (216) 509-1561 for the best consulting and bookkeeping services.