Speaker 1: 0:00

This is the Empowering Healthy Business Podcast, and I'm your host, cal Wilder. Each episode, we'll dive into topics important to folks who want to run businesses that are both nicely profitable, sustainable and scalable, and who want to achieve balance in their lives and realize their potential inside and outside of work. This show is sponsored by SmartBooks. Provider of bookkeeping and accounting for businesses let's get started. Provider of bookkeeping and accounting for businesses let's get started. Welcome listeners.

Speaker 1: 0:27

As you know, here at the Empowering Healthy Business podcast, we focus on ways business owners can drive long-term success in their businesses, and sometimes that could be a foundational topic, like how to get accurate and useful financial reports on a timely basis each month or stay in compliance with tax rules.

Speaker 1: 0:45

Or sometimes it may be more of a growth item, like budgeting and using financial metrics to make business decisions to drive growth and profitability. And sometimes it's more of a keep item, where you want to minimize the amount you need to pay in taxes or manage risks that could be very costly if you get hit with one of them right. So today's episode is going to be more about keeping more of your hard-earned money by minimizing taxes through figuring out how to take full advantage of home office expense business deductions. So this episode is geared toward business owners who have some discretion about how the business pays for certain of those expenses. So joining me today is Greg Reed, head of tax at SmartBooks, to help us understand how we can take advantage of those home office tax deductions. Welcome back to the show, greg.

Speaker 2: 1:36

Thanks for having me Happy Friday.

Speaker 1: 1:39

Happy Friday, I mean, as everybody knows. You know, working from home is more prevalent than ever and it's really become more of a permanent item for a lot of people, not a temporary item that we might have thought it would be a few years ago, right. So I think this is a very important topic to clarify what's possible, because I think there's some misconceptions. I feel like business owners some of them are not taking full advantage of this opportunity.

Speaker 2: 2:06

Yeah, Talking to a client a few weeks ago, they were saying that oh, I can't take the home office deduction because I have an office for the business. And I'm like, no, that's not true. You can absolutely take the home office deduction. That's not true. You can absolutely take the home office deduction and you know so, like you know all those years.

Speaker 1: 2:34

you know missed opportunities. You know a little bit here, a little bit there, all adds up.

Speaker 2: 2:38

So where do you want to begin here? So first I want to kind of shift gears a little bit, because this is something that we've heard rumors about.

Speaker 1: 2:48

I didn't know if it would actually go through, but kind of hot off the press.

Speaker 2: 2:54

As of September 30th, it looks like the IRS is no longer going to accept paper checks, so that would include, I would assume, estimated tax payments. When you have to pay your tax bill in April, if your account is giving you a voucher and you have to mail that in, then that's no longer going to be an option. You're going to have to go online and make those payments electronically.

Speaker 1: 3:31

Whoa, that's going to be a big change for a lot of people in this country, wow.

Speaker 2: 3:36

Yeah and then the other side of that is, you're getting a refund and no longer going to issue checks, so you're going to have to make sure that your direct deposit information is updated and you've got all those boxes checked, I'm assuming you'll still be able to send in paper checks to state governments. Those are usually a little further behind but, yeah, definitely a big change for a lot of taxpayers.

Speaker 1: 4:16

Alright, well, back to home office deductions, where we can save some money and not worry about how we're going to pay the money. Yes so hopefully with the home office section there is no mailing in checks.

Speaker 2: 4:29

Maybe you should get that direct deposit updated so that you get that refund. So, like I said, clients said no, can't get the home office. That's incorrect. If you have a place of business, you can still take the home office deduction. So what?

Speaker 1: 4:54

Greg, just to clarify one thing, because people my age or older we still remember there being like this official home office deduction with the IRS, like 20 plus years ago. But I think what you're talking about is not like a particular IRS program or election, it's just general business operating expenses that happen to go toward a home office, right?

Speaker 2: 5:18

Correct, yeah, so I think what you're referring to is the unreimbursed employee business expenses. I think what you're referring to is the unreimbursed employee business expenses. That was an old rule prior to the Trump tax cuts. It was an itemized deduction. It was exactly what it sounds like Unreimbursed employee business expenses. People probably took advantage of it, but now this is really just for business owners.

Speaker 2: 5:56

Okay, good to know. So the first question is like what qualifies as a home office? So you're going to look for, you know, an area home that's used regularly for business, exclusively for business.

Speaker 1: 6:20

It doesn't necessarily have to be your principal place of business, but you do have to conduct business at it, so your dining room table doesn't really count right.

Speaker 2: 6:25

It would be a hard one to justify. But, you're standing up to eat every night. Yeah, really, like if you have a room in your house, that's your. You know, and it's been used to, that's your. Yeah, it is minimized. For example, I'm recording from my right now you'll. I don't know if you can see the camera, but I've got like all the stuff back here and stuff like that, so like some minimized use, but for the most part this is just used for smart book tax.

Speaker 1: 7:13

So the next question is what are the expenses?

Speaker 2: 7:17

that we can actually take. So there's two sides of this point. There's the real estate side and then there's the stuff in your home office. So what's the stuff in the home office? If you buy desks, chairs, computers, printers, file cabinets, you know, furnishings for the home office, whiteboards, stuff like that, chances are you're already going to run a lot of this stuff directly to the business, which is what I recommend. But if you're not you know, maybe you're at Costco and you see, a good deal on a printer and you don't have your business card with you.

Speaker 2: 8:08

Uh, those can all be included as a home office expense, the uh. A little caveat to that. I don't know how many people are going to actually use this, but if you have a piece of furniture that's not used entirely for business use, you can absolutely take a forehand of that. So if you buy a very expensive desk and you're using it 80% for business, you could take 80% of the cost of the desk. Again, I think we get into some minimalist rules. Chances are you're not buying a. You know that's that expensive. Um, but yeah, something to think about. If you know, maybe you buy a desk for the family and kids are doing a little more there. Yeah, you don't want to be a little uh cautious with the expenses that you're taking?

Speaker 1: 9:28

All right, what's next?

Speaker 2: 9:30

So then I get into the real estate side of everything.

Speaker 1: 9:36

Now this is probably going to be more potentially some newer information. Like you said, I think most people are already expensing their home office equipment and supplies, but now we're talking about the real estate.

Speaker 2: 9:47

So now we get into the real estate. So what can we do if we can get more of the engineering with the rent real estate and access the utilities? Homeowners and veterans have an alarm on your house. Home office repairs, stuff like they could go to the entire house or expense of the entire house.

Speaker 2: 10:19

You're going to take a hoarding of those expenses right, and the idea is that you're going to take the square footage of your home office divided by the square footage of your living space in your home, and that's going to be the rate that they use. So you know, you have a thousand square foot home and you have a hundred square foot home office. 10% of all those expenses that I just mentioned are now a home office deduction. Just mentioned are now a home office construction.

Speaker 2: 10:55

A few things to note on that you don't have to include non-living space areas at home, so that would include like decks, stairways. So the idea is to kind of get that bottom number a little bit lower so we can increase that percentage.

Speaker 1: 11:15

Realistically. You know what's the range that you've seen people report.

Speaker 2: 11:20

I've seen typically like 10 to 20 percent.

Speaker 1: 11:27

If you're renting an apartment and maybe it's like a two-bedroom, that number might get a little bit higher, but yeah, typically it's 10 to 20% yeah it would be hard to probably justify more than 20%, unless you're in a unique situation.

Speaker 2: 11:45

Yeah, yeah. And now I do have some clients that use like. I have a construction client who uses their garage. For all of this there's storm materials there, there's storm tools there, so we do include the garage space as part of that home office. You can depreciate that portion of your home office over the 39-year commercial real estate. It does impact you if you go and sell your house in the future. You can't use that as a deduction. It's more of a government basis at all.

Speaker 1: 12:46

So let's talk through an example.

Speaker 1: 12:47

Here there's a couple of questions I've got for you, greg. Let's say I bought a home for $500,000 10 years ago. So my basis, so to speak, is $500,000. And we'll worry about the land later. Let's just say we have a home for $500,000. But that was 10 years ago and now I've started a business and I'm working out of the home. Was 10 years ago and now I've started a business and I'm working out of the home. And you know I can justify 15% of the home is, you know, my home office workspace. But the home is now worth $750,000. Now can I start depreciating 15% of 750 or am I stuck depreciating 15% of 500?

Speaker 2: 13:29

So it's the lower of cost to market.

Speaker 1: 13:32

And so you're going to go with 500 in that case. Okay, and now I bought a house on a piece of land, and so, if I remember correctly, land is not depreciable, right? So we have to split the 500 between the house and the land, right?

Speaker 2: 13:50

Yep.

Speaker 1: 13:52

And so a lot of complications. How would you, if somebody thinks this could be a meaningful opportunity for them to take advantage of? How would you suggest they go about determining the split between the house and the land?

Speaker 2: 14:07

the house and the land. You could certainly try to figure out what the land values are in your area.

Speaker 1: 14:16

But it would have had to be the land value 10 years ago, not now, right.

Speaker 2: 14:20

So it's tough. Honestly.

Speaker 1: 14:25

I'd say in our trade.

Speaker 2: 14:28

We're always looking at like 20 to 30% being important to land. We throw something to land. Maybe if you're in a metropolitan area you're putting a little bit more. I think the land is a little bit more valuable in Boston than it is here in Whitman. So certainly you know I don't want to take that into consideration, but I think that most of our annual revenue in like 20 to 30%, you know, is a safe bet for shaming to land.

Speaker 1: 15:03

Cool. Well, that's a new one. I hadn't really considered that one before.

Speaker 2: 15:40

Yeah, some people don't take the appreciation um. You don't have to necessarily, but, like I said, it's a digital deduction uh, it's just something you have to consider if you go to a hotel in the future.

Speaker 1: 15:58

Now I think where?

Speaker 2: 15:59

this could be coming to is if, all of a sudden, you know, maybe you haven't ran your business in 10 years and now you're selling your house and you're like oh well, there's some debris that I have to add back to the game. No, no, no, Right, and you may or may not remember to do that.

Speaker 1: 16:17

So it's kind of a messy situation to the game out of the sale Right, and you may or may not remember to do that. So it's kind of a messy situation.

Speaker 2: 16:33

A little bit of a messy situation Again. You know, I don't know how many people are looking at that, but certainly if you're trying to stay up to the law, you have to get that in mind. Other things. So if you're doing a complete office renovation any of those are 100% deductible.

Speaker 1: 16:59

Can you take accelerated depreciation on renovations? Are you stuck with 39 years on major renovations?

Speaker 2: 17:07

so you can take. Well. I mean, I think you have to consider, like, what a major renovation is. So like the idea is that you probably already have the office in your home and if you're painting and putting up some artwork.

Speaker 1: 17:24

So maintenance versus build out yeah.

Speaker 2: 17:28

If you're doing a build out, that's a different situation. That's going to be a business expense but you're going to have to take that over the 39 years. Maybe do a mini cost segregation study, but for the most part that's going to be a 39-year asset that you have to depreciate. Things like structural components. So if you put a new roof on HVAC, stuff like that would all be subject to the allocation percentage so 10% to 20% Great. The next thing is how do you get the money? Where?

Speaker 2: 18:17

does that come from. You know where's this cash come from, and I always advise clients to do at least a quarterly reimbursement from the business, and so all you're going to do is fill out a reimbursement expense form, as you would if you were an employee, and I would say you know, submit that on at least a quarterly basis and and have the business essentially beat you whole again, and then that becomes an expense on the business income statement.

Speaker 2: 18:56

And what kind of documentation do you need to keep to be able to support this, because some of these could be seen as aggressive deductions, right, it doesn't raise red flags with the IRS, unless you're being you know if you're trying to with the IRS, unless you're being you know if you're trying to tell the IRS that 80% of their home is home on 100%. But typically it's not going to be like a red flag raiser. But you do want to make sure that you're keeping receipts and probably expanding those with the expense report, standard documentation that you would need to complete for the business expenses that you take.

Speaker 2: 19:49

And the reason I say quarterly is because things happen throughout the year and you might forget about them. If you put a new roof on in January and then in December, you're trying to remember all the expenses that you incurred throughout the year. You might be like was that roof in December or January? When would that happen?

Speaker 1: 20:15

And so I'd say quarterly keep everything fresh maximize those deductions, get the most bang for your buck. Right, because you might have paid a deposit the previous December. The job got done in January. You might forget when you paid the money. You got to go spend time looking it all up.

Speaker 2: 20:36

Yep, absolutely that your home office is your principal place of business, then now you can start deducting your PQ. And so how do we do that? We would just take the miles driven from your home office to the other office to maybe a client site and multiply that by the extensive mileage rate and again the business is reimbursing you for easy expenses.

Speaker 2: 21:20

So you might be able to add an extra $2,000 or 2,000 miles to your mileage reimbursement, which at you know 67 cents. I don't know what the car rate is off the top of my head, but you know, you're looking at at least over a thousand dollar deduction. You know it's a thousand dollars back in your pocket, so how do you justify that? A principal plays a business? Yeah, I think you go into every situation separately with your accountant and see how much risk you're willing to take.

Speaker 2: 22:07

I remember reading a case that I did once where a doctor in Boston had a home office, reviewed x-ray scans, whatever, made all the business decisions from their home office and the only reason they went to the hospital was to consult patients. But most of the business was handled at the home office. And so the IRS challenged this, and the IRS won because they determined that the home office was the primary place of business.

Speaker 1: 22:59

It's a cool little trick if you want to try to deduct your commute. All right. What's next on the list?

Speaker 2: 23:14

Let's see what else can we do for home office. That's kind of extensive. We talked about the depreciation. We talked about the real estate side of things we talked about, the items in your home office, the items in your home office. You know, I think again the key here is to know that this exists and that in today's world you probably qualify for it, assuming you have a place in your home that you can justify as a home office, and so if you're not taking this deduction, it's certainly something you want to take.

Speaker 2: 23:57

I guess the other thing to mention is, if you are a cash basis taxpayer, you want to make sure that at the end of the year you're submitting your expense reports and getting reimbursed for these expenses before 1231. So we want to see the cash leaving the business and going into your pocket before 1231. Otherwise it's going to come to spend in the following year. So you know, you reimburse yourself on January 1st, then you get a whole year to take the expense for that.

Speaker 1: 24:36

One other question, Greg these days, these accessory buildings that increasingly are becoming popular, you know, basically nice sheds in your yard that some people are using as like studio, commercial studio space. How does it work with those? Because that's just in theory, you know, exclusively used by the business, so it's 100% allocated right. How does that work?

Speaker 2: 25:04

So, yeah, you buy a shed and it's your business shed. That's 100%. So there's something that obviously you have to allocate. Unless you have a separate utility line to the shed, then you need to allocate some of the expenses. But for the most part, you know you can even argue that the increase in your real estate tax bill, would you know? Whatever the difference is is the drop-down that you can take. But yeah, that's certainly an expense that you can take.

Speaker 1: 25:50

Awesome. And then I assume there's some good ideas to. You know, keep photographic evidence or journals every now and then to try to justify gray areas, to help defend yourself in the event you are ever audited.

Speaker 2: 26:08

Yeah, you want to. You know photos are great. You are ever audited. Yeah, you want to. You know photos are great. If you're using the home office only like 80% for business, you want to keep a journal of you know what your. You know the portion that's business and the portion that's not.

Speaker 1: 26:29

Yeah, obviously, you know, like I said, earlier. You need to keep the same level of documentation as you would for your normally operating business expenses Hopefully very informative for listeners to try to clarify what is and is not deductible for home office expenses, as well as kind of how to go about doing some of those things. If folks have questions, want to talk one-on-one with you about their own situations, what's the best way for them to reach you?

Speaker 2: 27:04

You can grab some time on my calendar, smartbookstaxcom. There's a link on my webpage. That's probably the best way to get a hold of me. You can email me directly at greez at smartbookstaxcom.

Speaker 1: 27:23

Awesome. Well, thanks for joining us again, Greg. We'll talk soon.

Speaker 2: 27:26

All right, thanks for having me.

Speaker 1: 27:28

Bye-bye Another episode in the books. Thank you so much for having me. Bye-bye Another episode in the books. Thank you so much for tuning in For show notes and more. Visit empoweringhealthybusinesscom If you would like to have a one-on-one discussion with me or possibly engage SmartBooks to help with your business. You can reach me at cal C-A-L at empoweringhealthybusinesscom or message me on LinkedIn, where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for business owners signing off.