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Home Office Tax Strategies Write Off Home Office (BIG Home Office Tax Deductions!)

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- [Toby Mathis] I have an office within my home

how do I show or indicate that on my taxes?

So this is Tax 101 for Anderson.

We do not like home office deductions, number one.

And that means, you writing it off on your Schedule C.

If you have a business, and you're using a home office,

you're filing, I think it's an 8829,

- [Jeff Webb] Right.

- [Toby Mathis] And you are writing that off

as part of your business,

and it's on your return,

and that's what everybody says,

"Hey, there's a red flag."

The red flag is that

you're filing a Schedule C on your personal return.

Not just the home office,

but that home office certainly doesn't help.

What I'd rather see is a corporation, S or a C Corp,

in the mix, reimbursing you as an employee for your use

or for the company's use of your home office,

and it's not renting it from you,

it's reimbursing you the expenses attributed

to that portion of your home.

So I'm going to draw this up.

Let's say you have a house.

And you have this little section of your house

called a home office.

And it is, let's say that this one is 10 by 10,

so it's 100 square feet.

What the IRS allows your employer to do,

an S or a C Corp, is reimburse

you the expenses of that home office.

And the reimbursement is based off of the fact

that you had expenses

for the whole home,

and it doesn't matter whether it's a rental

or a purchased home.

You still have expenses.

You have expenses like real estate taxes,

mortgage,

utilities,

- [Jeff] HOA

- [Toby Mathis] All of it, HOA...

Even things like depreciation.

- [Jeff Webb] Yep.

- [Toby Mathis] Those are all expenses,

and what it does is it let's you pay a percentage back

and, guess what?

No where on your return does this money show up.

And I say your return.

This is the, say, I always use Krispy Kremes as my examples,

but I say, if I ask Jeff, "Hey, on your way into the office,

"grab some Krispy Kremes, and I'll reimburse you."

And Jeff goes, and he buys a whole bunch of Krispy Kremes,

and he comes into the office, and says,

"Hey, that was 50 bucks,"

and we write him a company check for $50,

where does Jeff report that?

The answer is, he doesn't.

He got reimbursed.

So this is the most important word you'll ever hear:

Accountable.

This is called an accountable plan.

When you have an employer, they can reimburse you

for things that you incur on their behalf.

And that's just, there's a laundry list of 'em,

but the most important ones are things like

your computer, your cell phone, your home, your utilities

that you're using for the convenience of the employer,

all those things,

now it can reimburse you.

So now we know that we want to get reimbursed,

so don't do a home office because that's you.

This is a business reimbursing you for the use of your home

at their convenience.

It changes up the rules a little bit.

Now, the way to calculate this,

there's a number of ways,

the IRS has what's called a simple test,

where this is $5 per square foot per year.

So if this is 10 by 10, you would get a $500 deduction

at the end of year, or reimbursement,

you don't have to report it.

The company gets to just write off $500 as a lease expense.

OK, that sucks.

The other way that people do is they look and say

the entire house, so let's the entire house,

I don't know how big this should be.

This looks like 30 by 30,

so let's say you have a 30 by 30 house,

so you have 1/9 would be the deduction.

So if you have expenses of $9,000 throughout the year,

you would get a $1,000 deduction.

You get 1/9 of that because

one, this is 100 square foot versus 900 square feet.

Now, there's another method that's not the only methods,

there's actually like nine,

although I've never seen all nine.

I use about three.

Jeff, how many, like what are your things ...

- [Jeff Webb] And I only use a couple.

I use these two.

I use the simplified method.

- [Toby Mathis] You're such an accountant.

- [Jeff Webb] I'm such an accountant.

- [Toby Mathis] So there's two ways to do it.

You could do the square footage method

which is based off of this 30 by 30 versus the 10 by 10,

so it's 900 versus 100.

You could use the net square footage,

where we remove hallways and bathrooms

and places for your water heater,

and your air conditioner, and all those things,

and you remove them, and say,

"Hey, we're only looking at the net usable square footage."

This is what you use in commercial and stuff like that.

- [Jeff Webb] Right.

- [Toby Mathis] So let's say that your net square footage,

the net usable square footage,

we have a hallway that runs through here,

and we have a, you know, a couple places...

Here's where the water heater is, and all that stuff,

and let's say that we remove 200 square feet.

Now it is 700 to 100,

which I don't know what that is, but I'll just pretend

that's got to be about 14%?

That's another way is that net square footage,

and now there's another one,

that's not used enough, in my opinion,

which is the number of rooms method.

Where we look at the total house, and we say,

hey, here's the area being used there,

there's another

let's say that we have a total of five rooms,

and this is all hallway or common space

or something like that,

actually, we'll make another room,

we'll just make this the non-usable traffic area.

Kind of a goofy layout for a house,

but let's just say we have six rooms.

Now we are six to one, and that's going to be way better.

That's going to be, six goes into one how many times?

All right, this is one of those things

where now I'm just going to grab a flipping calculator.

So one divided by six, so that's 16.6%,

so we would look at all the expenses,

and you would take 16% of that.

So, what did I use in my example?

- [Jeff Webb] What did you say, 9,000?

- [Toby Mathis] 9,000? So let's say that we have 9,000 times 16,

so now I have a $1,400 expense which is by far the best.

Now I can reimburse me that amount,

and, again, I'm throwing numbers out at you.

Your numbers are going to be way different just cause

9,000 is not what it actually costs to own a home,

unless you're living in Indiana in a funky area.

- [Jeff Webb] And while we talk about mortgage,

and real estate tax with depreciation a lot,

a lot of people rent their homes,

and that rent expense is also a part of this formula.

- [Toby Mathis] (agrees) Now, I'm going to do a shameless plug,

and I'm going to tell you,

if you want to learn about this stuff,

and you want to see the action, you have the calculators

and all that jazz that we use, then you're going to want

to come to an event that's called Tax-Wise.

You're going to want to go to that.

- [Jeff Webb] It's a blast.

- [Toby Mathis] Yeah, because we break it down,

and so there's my shameless plug.

You're going to want to come to that.

Now if you're Platinum,

you're probably getting free tickets.

If you're not Platinum, you're not.

You're going to pay something, but for the Platinum folks,

this is a no-brainer.

You know, you always want to come,

hang out with us about tax

That's just one, that's one of 29

different deductions we talk about.

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