How To Setup a Home Office Deduction (Full Walkthrough)

can i help you bob roberts revenue agent with the irs this is my associate dick richards bob dick what's up the irs sent you several requests to produce your tax returns over the last seven years [Music] why are you running why are you running oh hey welcome back to action made simple you know where you're at right we're in an apartment today and today i'm going to show you guys how to take a home office deduction in your apartment step by step come on in [Music] all right guys so today we're in an apartment in orange county california i'm lucky enough to be able to view apartments by some of my clients and i'm here in an apartment today that's completely empty to show you how you can take a home office deduction even when you're renting first what we're going to do is we're going to take a tour of this entire place figure out which spot in this place we want to be our home office and then we're going to do some math to know what our tax savings are follow me [Music] all right guys we're walking through the hallway heading into the main room as you guys can see pretty open windows i am a person that needs views wherever i'm living but if i was living here i would need a little bit of a better view than what i'm seeing currently right now which is the street but as you guys can tell pretty open now this was your living room this also is your kitchen as well there's the stoves the countertops you have the refrigerator and you also have the the cabinets and washer in here this space right here right off the bat probably wouldn't be a space that you would have your home office you might have your couches your tv maybe a kitchen counter table if you can fit it but you probably wouldn't want to do business in this office you might want to have a quiet dedicated space so let's keep looking around what's in here it doesn't look like anything what is the purpose of this four it's literally guys this is my arm like what are you going to put in here maybe it's just a shoe closet you're supposed to put shoes in here like i don't know this one's what you call a head scratcher i don't know what the purpose of that one is for all right come in here oh yeah this one's a lot prettier nice much more spacious but this kind of feels like a bedroom to me where someone might have a bed maybe a nightstand to either side when you come in you see this closet in here this looks like a walk-in closet yep now this side of the apartment let's see if they have a bathroom oh yes there's another bathroom in here with dual dual sinks showers this side of the apartment could be an office space it could be an office space i could see some desks being set up in here having a nice little rug maybe some cameras some lights i could definitely see this being an office space but it kind of feels to me like more of a more of a bedroom let's walk through all right so we're back out in the hallway and this closet that doesn't make sense but we have one other room here the last room here is a little bit smaller than the previous room and it's small enough to where it feels like it would be an office space instead of a bedroom but it could be a second bedroom too when you come in there's also this walkway here now let's say that i decide to okay yep there's a closet let's say i decide to make this side of the apartment my home office my question to you guys we're viewing right now is does this walk space that you guys are in right here would that count as being a part of the home office i'll give you 30 seconds [Music] so keep in mind does this walkway count as a part of the home office if i make this entire room my home office you have your answer the answer is yes walkways can count as a part of your home office because these are pass-through areas to get into your home office so you can actually include this entire portion as a part of your home office and if you're using this closet in here this entire closet space could also be included as a part of home office we just need to make sure that we also include this as the square footage now what about the bathroom back here we are seeing that this is a two-bedroom two-bathroom apartment would i as a taxpayer be able to include this entire bathroom as a part of my home office well if this is the bathroom that's associated with my business and it's on the side of my business then absolutely i can so guys i want you to understand something your home office can include the bathroom if it's being used for business your home office can include the closet if it's being used for business and of course it can include a designated room that's exclusively used for business the word exclusive is probably the most important word that the irs put when they were creating this tax code that allowed for taxpayers to take the home office because the irs wanted to make sure that you were using the space exclusively for business when you think about it if i were to set up a home office out here maybe on a dinner table or maybe on a side wall i might end up using a portion of this dinner table to actually have dinner or have lunch or when my friends or buddies come over on the weekends they're hanging out over here so now the exclusivity test got thrown out the window and now this portion may not be exclusively used for business which means it would be disallowed on my tax returns if i were to get audited and i couldn't justify this now i mean you guys are probably thinking how would the irs ever know taxpayer are you actually taking a photo and showing documentation of you using that area and would it make sense for you to have your home office be in the same place that you're running your entire kitchen and operation in here with your family this is when it can become a little bit hard and where the irs can have a little bit more leniency on winning in an audit if you are ever audited and yes the irs can ask for documentation outside of just what you spent your money on they could request a photo to see if you have any proof that the space was truly a space dedicated for your home office so we want to make sure that we're using a space that's exclusively used for business we learned already that the walkway would count i personally think that if i was living here i would choose this side of the apartment to take my home office so let's go ahead and grab a whiteboard and figure out the entire square footage of this apartment complex and then get the square footage of the side of the apartment that we want to be our home office so we can calculate what our home office deduction is going to be all right guys so in order for us to take the home office deduction the first thing that we have to understand is that there's two different methods to taking the home office deduction there's the simplified method which i'm going to explain in a moment on the whiteboard and then there's the regular method where you're just getting the square footage of the home and the square footage of your home office space both methods require you to do a calculation and in order to do the calculation we need to get the square footage of what we're taking as a home office so i got my measuring tape and we're going to measure this room [Applause] [Music] next thing i'm going to do is i'm going to get the square footage of this entire walk space so i'm counting the walk space i'm counting this portion of the room is cut off right here and then up to here i'm going to get this walk space so i can factor that in as well [Music] all right taxpayer so let's just say i have some additional film equipment and that i need a closet to store my additional film equipment and extra computers laptops ipads backpacks and artwork since i need artwork to go up on my home office wall all right now i'm using the closet okay so what i'm gonna do is i'm gonna get the square footage of the closet just like i got the square footage of the hallway same process guys [Music] so now we're going to get these numbers and do some calculations now i did say that if you had a home office that came with a bathroom you can use the bathroom for the home office and dedicate it to the business this is the businesses home office bathroom i'm going to include that bathroom as a part of the home office so we're going to go in there and calculate that next now some of you taxpayers at home and some of you cpas watching this are like oh my gosh she's really about to go in there into the bathroom and include the bathroom do you use the bathroom when you work i think so okay so yes we're going to include the bathroom i spend a majority of my time working from home i do get up and use the bathroom regularly because i believe in putting in fluids into my body if you're like me you're probably using your bathroom at home too so why should we not be allowed to include our bathroom as a business owner who's using the bathroom while we're working come on guys [Music] all right let's start off from over here i'm gonna get this wall and i'm gonna bring it down here and then we're done it's a wrap and i can do all the math on the white board [Music] all right guys so we got the white board i'm gonna explain how you can take the home office deduction by showing you the math before we do any math understand that there are two different ways in which you can take the home office deduction i didn't create this the government created it and they gave you two different ways to do it the ways in which you can do it are leveraging either the simplified method yes it is extremely simple or the regular method and to be honest both of these methods are simple to me so i don't understand the naming of it simplified regularly they could have got a little bit more creative but we're going to go over the simplified method first before i jump into this i'm sorry to say this but if you're a w-2 taxpayer and you do not have a business or investment properties you can't leverage any of what i'm talking about today i don't know how you survived on my youtube channel without setting up an llc so far but i want you to establish one and start a business so you can have some fun like some of my business owners and real estate investors over here okay okay okay now to my business owners to my investors who happen to manage their properties or have enough management capacity to where they can justify having a home office listen up the simplified method is very easy the government states that you can take five dollars per square foot okay but they said that we are only able to take five dollars per square foot up to 300 square feet so simple math i do five dollars times one square foot and i get five and i'm only able to have 300 of those so that means i'm only able to take fifteen hundred dollars in a tax deduction using the simplified method okay so that's the simplified method five dollars per square foot simple math tells you that if you have a property that's three hundred square feet five times three hundred is fifteen hundred dollars carlton what if my home office is larger than 300 square feet i'm sorry maybe the simplified method isn't for you because the government only allows for you to ride off up to 300 square feet okay so if you have 200 square feet you can take five by 200 and you're able to write off a thousand if you only have 100 square feet you can see how this follows so this simplified method caps you at only fifteen hundred dollars in total this includes any mortgage insurance property taxes rent the entire cap is fifteen hundred dollars if you're taking the simplified method now i'll be honest when you're dealing with a new business owner the simplified method is probably the easiest method because maybe a new business owner didn't do a really good job documenting everything but they do have a home office and they know their home office square footage so it's easy to just give the tax accountant the square footage of your home office and then we just take that square footage and multiply by five do you see how simple it is that's why they call it the simplified method okay the simplified method may not save you as much as you want to have on your taxes so this is when we have to look at a method that's a little bit different the method that's a little bit different it's called the regular method and the regular method is where you're taking the percentage of your home office and the percentage of your home and you're dividing these two by each other with some division so my home office [Music] square footage needs to be divided by my homes my home's square footage okay so for any taxpayer that is looking to take the home office deduction whether you're renting like an apartment like this or if you're a homeowner who has a mortgage then you can take a portion of your home and write it off by leveraging either the simple method or going by the regular method where you are grabbing the percentage of your home office space the percentage of your entire home and you're going to divide that to get a percentage that you're using that's home office related so in our scenario here this apartment complex and the room that we've chosen to use the home office's room square footage we've taken and have started to calculate a portion of it out the actual room square footage was 109.25 square feet i got it all the way down to the centimeters for you the walkway was 27.36 square feet the closet was 23.80 square feet and the entire bathroom was 61 square feet yes we're including the bathroom taxpayer the next thing i have to do is add up this square footage to get the square footage of the percent that's in business use the actual home office then i just need to look online to determine what is the square footage of this particular unit inside of this apartment complex to determine the percentage that i'm using that's in home office use so let's do the math which is 220 square feet hmm now i know what you might be thinking carlton the square footage of the home office over there where you actually included the closet plus the walkway plus the bathroom that's falling less than the simplified method where you get to take up to 300 square feet wouldn't you want to take the simplified method since it gives you up to 300 square feet i only have 221.41 square feet in business use i can't take the fullest amount of 300 square feet if i'm not taking 300 square feet as my home office that's just the maximum amount i'm able to take since i only have 221.41 square feet in business use i need to divide that by the entire unit square feet the unit square feet that we're in is 1200 square feet so simple math we pull out the calculator do 221.41 divided by 1200 the square feet of the entire place and i get 18.4 so that means that 18 of this apartment is being used for home office that means the other 82 is being used for personal use this seems to me like a very safe percentage 18 it's it's rare that i see 60 percent 55 percent 70 home office you have to have a pretty big space and a pretty big reason why you're using a majority of your space if you're taking 50 60 70 home office but i'm not gonna say i've never seen it before and i'm not gonna say that it's something that you can't do but just look at the percentage here it kind of gives you an idea based on this apartment size of why it might make sense of why it's 18 now the next thing that i want you guys to know is i want you to know the rent of this apartment the rent of this apartment is 3 800 is rent something that you can write off when you're taking a home office living in an apartment the answer is yes is mortgage something you can write off if you're living in a primary residence the answer is no why is that carlton because when you live in a primary residence that you bought as a house the house has depreciation that you can take based on the percentage that's in business purpose so let's go over what we can write off our expenses that we get to take that are business related well i know for a fact that everybody understands that we get to take utilities but what are utilities that's electricity that's water that's gas maybe i even want to throw cable in there these are my utilities including internet i also can take my property taxes if i'm living in a primary residence then i have property taxes that i'm paying into yes donald trump limited you to only ten thousand dollars as an itemized deduction but you can also claim property taxes as a home office deduction hmm i can also write off my mortgage interest if i have a mortgage i can also write off my fees a portion of my hoa fees i can also write off repairs if i'm making repairs to my home office room i have a lot of clients that are looking to do remodeling in their primary residence and sometimes the primary residence that they're choosing to remodel is actually their home office so we can actually make write-offs for repairs and improvements to the home office space guys so this right here this list it includes rent it also includes depreciation because if you're living in a primary residence you're claiming depreciation if you're renting you're claiming rent so this apartment complex has pretty pretty competitive rents for being in southern california but it's also expensive and this apartment complex is renting for 3 800 for a 2 bedroom 2 bath maybe that sounds about fair to you i'm going to be able to take 18 of this rent as well as improvements repairs hoa fees mortgage interest if i'm paying mortgage interest property taxes if i was paying property taxes electricity water gas cable and internet let's just just factor in the rent eighteen percent of thirty eight hundred dollars thirty eight hundred times eighteen percent i get 684 guys this is just per month if i'm renting out my home office to my business for the entire year i'm using that home office for my business the entire year i get to take 12 months of a home office deduction this just turned into an 8 208 dollar tax deduction for me hmm that seems to be a lot bigger than the 1500 that we were capped at when we were taking the simplified method because the simplified method states that we can only take up to 300 square foot and we only get five dollars per square foot so if i'm only getting five dollars per square foot does it make sense for me to take the simplified method maybe not unless you want a simple tax return hello welcome to taxes made simple i'm carleton dennis and my job is to teach you how to leverage the tax code to the fullest extent you're in classroom right now the simplified method isn't leveraging the tax code to its fullest extent but maybe taking the regular method actually is for you and we just shown by doing the math that if we would have taken the simplified method maybe our tax accountant told us to take the simplified method because he knows it's easy when he's following the return because doesn't he have other people that he's doing tax returns for when we learned about the simplified method it was capping us at fifteen hundred dollars it does not matter if i was living in the ritz carlton and i was renting out a portion of the ritz fifteen hundred dollars is my cap but if i jump over and i take the regular method i'm already looking at six hundred and eighty four dollars a month 8 200 a year times that by just the regular 32 tax bracket and let's make it really real you're looking at about 2 626 in tax savings at a 32 marginal tax rate okay i like getting an additional 2 600 in taxes that i don't have to pay it's almost as much as this whole entire rent and that is why leveraging real estate and that is why leveraging your home is an important tax deduction as a business owner if you're somebody that's looking to leverage a home office deduction without fear of the irs without your cpa stepping over your toes when you know you qualify to take this deduction visit the link below i've created an entire guide for you that'll walk you through the entire steps of how to take this home office deduction and how to calculate it so you will never have any confusion my name is carlton dennis thank you so much for joining me on this video i look forward to seeing you on the next video but if you can like comment subscribe you know what it does i'll see you guys on the next video over now [Music] carl what are you doing figuring the space out this is like harry potter style room right here right i mean follow it with me for a minute harry potter was like stuck underneath the closet this gives me similar vibes he got a lot of work done if you're looking for an awesome spot to get business done what better way to focus than a locker room like this huh harry harry potter vibes

Channel: Karlton Dennis

Views: 30,770

Keywords: taxes, tax help, tax expert, home office, home office deduction, write off, real estate, tax deduction, save money, how to, Karlton Dennis

Id: kzQFjnUTVLM

Length: 26min 6sec (1566 seconds)

Published: Fri Apr 29 2022