In a previous post, we talked about deducting a part of your mortgage or rent on your taxes if you operate an office in your home exclusively for your business. We also discussed when that is allowed by the IRS. Now we’ll discuss how to maximize your home office deductions.
But the fun doesn’t end there!
There are ways to deduct your utilities (electric, water, internet, gas, air conditioning), insurance, maintenance expenses, possibly even depreciation on your home!
The two methods for deducting home expenses are the simplified method and the expense method.
The Simplified Method
The simplified method is named that way because it’s… simple. Here’s how to do it.
Take the square feet of your home that you use regularly and exclusively for business, and multiply the square footage by $5.
Let’s say you use 50 square feet of your home. $5 times 50 is $250.Then you can deduct $250 worth of expenses per year. It’s not nothing. This has a 300 square foot limit, or a $1500 limit. So, if you believe you’ll have more expenses than this, you’re better off using the expense method and IRS form 8829. That plus Schedule C explains what to do.
Maximize Your Home Office Deductions With the The Expense Method
The expense method is made mostly of two parts of form 8829. The first part takes the square footage area used for your business and divides it by the total area of your home. This gives you a percentage. This percentage will be multiplied by the dollar amounts of every allowable deduction in part two to get your tax-deductible expense amounts that you’ll claim on your taxes. Part three covers depreciation and part four covers casualty losses and carryover expenses from the previous year.
As you can see, most people run up against the $1500 limit of the simplified method rather quickly and transition to the expense method, despite the forms required for it. Note that the IRS will get suspicious if you are deducting expenses that would have needed to be paid regardless of whether or not you were conducting business in your home, such as mortgage interest and real estate taxes. For that reason, and because the form does have some back and forth to calculate, I recommend the use of a CPA to help you prepare form 8829. If it takes him or her half an hour to do this with you, he can save you thousands. Then just repeat it the next year and it will take even less time than that.
To have me took at your books and see how I can save you business time and money as your bookkeeper, schedule a call with me.