What's up everybody? Today I'm going to be talking about the home office tax deduction
with a new space okay. What do I mean by that? I mean it's a, it's a tax deduction that you
have for the business use of your personal home. But if, let's say you added a new space,
like you built a new addition on the main level of your home or you added a new basement which is
what we're doing now. How do you, how to account for that okay. So first I'm going to start off
with what is a home office deduction? It is basically a business use of your home that you
can write off. You know you're basically writing a portion of your home on your taxes and that will
help with you know, offsetting your income, your taxable income. So it could be an entire room,
or the deduction could be like a partial room, or it can even be like a little area of your kitchen
or something. As long as a space is dedicated use for business. And this is for business owners
at the moment okay. This deduction went away for w-2 employees after the Trump tax reform. It
will probably come back after the year 2025 but for now this is only valid for business owners.
Like I said the spaces could vary, it could be an entire room, a partial room, it could be an
entire basement if you use it solely for business okay. Now remember the key here is it has to be
dedicated and the IRS verifies that by coming into your home at night and measuring all your shit
okay. Not really but you know, don't mess around here. It's got to be a dedicated office space.
So who can claim this deduction? Well first of all sole proprietors can do it easily,
LLC members can do it, multi-member LLCs can do it, and owners of partnerships or partners
in partnerships can claim this deduction pretty easily okay. If you own a corporation, whether
it's a C Corp or an S Corp, there's a few more steps you got to do. It's not so simple but that's
another video for another time. So basically if you're a sole proprietor or a single member LLC,
you claim this deduction on your Schedule C. And to calculate the deduction you're
going to have to fill out Form 8829. And it gives you all the instructions and all the,
all the calculations there and I'll go over that with you a little bit later in this video, but if
that's claimed on your Schedule C okay. If you're an owner of a multi-member LLC or a partnership
that's going to be claimed as an unreimbursed partner expense. And you know again, that's
another video for another time but it's, you can do it pretty easily on your personal tax return.
The reason that you can't really do it on corporations is because owners of corporations
are supposed to be considered employees okay. So if you're an employee of the corporation,
then the corporation should technically be reimbursing you for these expenses
and you shouldn't be claiming it on your tax return okay. Now you could, used to claim it
before the Trump tax reform on your tax return if you're an employee. But you know, that that tax
reform got rid of all those unreimbursed employee expenses on the Schedule A. And so in order for
you to claim it as an owner of an S Corp, you basically have to create a reimbursement plan
through your company and reimburse yourself from company to your personal account for these
expenses. So how do you calculate these expenses? Well let's jump over here and I'll show you.
Now there's two methods of calculating your home office deduction. First is the simplified
method which is very simple. You just take the measurement of your home office, in this
example we have 100 square feet right here. So for the simplified method, you're going to take
100 square feet times five and you'll get your $500 deduction. Because the simplified method is
five dollars per square foot and you don't have to deal with you know, gathering all your bills
and figuring out depreciation and all that stuff. So it's much simpler but you are limited to a
300 square foot home office if you choose that method okay. And usually the simplified method
is less of a deduction than the actual expense method. To go over the actual expense method
I'll show you that right here. Okay first you measure the square foot of your office
and then you get your finished square foot of your home. This is usually listed on like Zillow or
you know if you're renting this should be, you should be able to find this information pretty
easily so that you don't have to measure it yourself. So you take office divided by
entire home and you get this percentage right here. In this example this is going to be 10%,
and then you're going to want to gather all your bills that you have. So let's say you rent a
place, that's going to be your monthly rent, your utilities, your internet, whatever other bills you
have to basically maintain the cost of living in that space okay. So in this case we have
$2,300 per month to live in this apartment. And to figure out the home office expense deduction
we're going to take $2,300 times 10% which we just calculated up here okay. And that gives us $230
per month that we can deduct on our dedicated home office space in this apartment. Now if you own a
place it's going to be a little bit different from renting okay. Because you don't actually pay rent,
you pay a mortgage and the mortgage is partially interest and partially principal. Well only the
interest is deductible okay. So we have mortgage interest, property taxes, utilities, internet,
and this other thing called depreciation which I'm not going to go too much into right now.
But depreciation is basically you're telling the government
that because you're using this home for business it is depreciating in value on paper okay. We know
that homes typically appreciate, that's obvious but on paper any asset that you use for business
will depreciate over time. So maybe I'll make another video down the road on how to
calculate depreciation for home office expense. But those are all the things that are included.
So you add those up for the year okay, or for however many months you use your office.
And you multiply it by this number, the 10% number that you originally calculated in the first place.
Pretty simple there okay. And these calculations are all done on Form 8829, the Business Use of
Home Form. Now what happens if you have a new space? Like you get a new basement or you add a
new addition to your home? You have to account for that. So if you've been doing it with this
calculation right here, the hundred over a thousand for many years and you added a basement,
or you added an addition to your home, this has to change okay. Because your total finished square
foot has increased. So you've got to, you measure out you know, the space of your new addition
and then include it in the denominator for this calculation. And that will likely lower your home
office deduction expense. Now if you added a new addition to your home just for business,
then that would increase it. Obviously in this case it's going to lower it,
so we did like a finished basement like another 800 square foot or something that's going to
bring this number down dramatically. A space that you just added on, that the square footage
of that space will go into your denominator, it has to be added to your total square footage,
and your calculation will change that way. Keep in mind, some people use their garage
as you know, a space you know, whether they they use like a portion of the garage for like storage,
or for solely, for like their Touro car rental, or whatever. That portion of the garage can be
used as a "home office" if you will. But if you do that you have to include the entire square
footage of the garage in your denominator as well. And as you can see in my example I didn't include
any garage square footage. So just keep that in mind okay. Or if you have like an external shed
on your property or like a second you know, second building in your property,
just make sure you include the square footage of those buildings as well if you're going to
use any part in those external buildings as part of your business home office deduction
okay. So that's all I've got for today. Thanks for joining me. And if you haven't done so already,
please subscribe to my channel I'd really appreciate it. Smash that like button, share
this video with anybody that you think might find it helpful, and also leave me a comment below with
any questions or concerns you might have alright. So take care for now and I'll see you next time.
so