The best tip I ever got from a CPA was to move my firm from a rented office space to my home. But it was important to understand the tax code for qualified write offs.
Following are some tips, but it’d be best to double-check with your tax specialist.
In my situation, one of the bedrooms was changed to an office for my personal assistant. Another bedroom was transformed into my office.
Both offices had oak desks, file cabinets, PCs, calculators and other office equipment. Instead of personal clothes, those closets housed shelving for my clients’ marketing collateral, HR training workbooks, and other client projects.
Ironically, I’d been able to use the rest of the home to work. For example, I have enjoyed my work in using my WIFI and a notebook computer while sitting in my favorite leather chair in the family room.
Once, during an immobile period when I underwent back surgery, a lot of work was conducted in the bedroom.
But as long as I maintained those two rooms as bonafide office space, I was in the clear. To justify the write-offs, I used a tape measure to measure the square footage of those offices, which was then deducted from the square footage of the home.
To keep the IRS out of your face, here are examples of the ground rules:
1. Have a designated office space.
Many people launch their startups on the dining room table or garage. Great idea. Iconic companies such as Hewlett-Packard were launched in garages.
But to qualify for tax deductions, your work space cannot be a multi-purpose area.
2. You can use one of two options to deduct office expenses.
Firstly, the IRS will allow you the option of deducting $5 per square foot up to 300 square feet. That’s with a maximum of $1,500. For many entrepreneurs, this represents an unfavorable option.
Secondly, consider keeping track of all your expenses and deduct them. For most, this probably results in higher write-offs. But you still might face the prospect of allowing an IRS auditor into your home to verify your deduction. It will help if you understand the mindset of IRS auditors.
3. Depending on your legal form, you can lease your home office to your company.
It does get a little tricky. In essence, the expense is written off by the corporation. As a homeowner, you must show it as income on Schedule E of your personal return.
However, deductions aren’t allowed for your rental income if your company is a Sub S corporation.
To circumvent this rule, your corporation can reimburse you for its share of home expenses such as cleaning, repairs, property taxes and utilities. This, of course, means your corporation will use these as write-offs.
4. An option as a corporation if you rent vs. buying your home.
You can write off a percentage of the business space of your home. Cut a check for its percentage-use from your business account to you as the “landlord.” Make sure you have a personal account from which you then pay the balance for your personal use.
In other words, let’s say your home totals 2,100 square feet, your office space is 700 square feet, and your rent as a tenant is $2,100. This means your business space takes up 33 percent. So you’d pay $700 from your business account as an expense for rent and $1,400 from your personal funds for the remainder of the rent to landlord.
From the Coach’s Corner, here are more financial tips:
Keys to Protect Yourself from Skyrocketing Trend – Tax Identity Theft – Tax identity theft is increasingly victimizing Americans, according to the Internal Revenue Service.
8 Strategies When Sales Drop and Costs Cut into Your Profits – If your sales are down and costs are hurting your profits, you’re certainly not alone. This is still not a good economy for many sectors.
Small Business Tips to Protect Your Bank Accounts – Imagine for a moment. You’re sitting at your desk enjoying a second cup of morning coffee. Then, your phone rings. It’s a call from your bank to discuss possible fraud.
To Cope with Rising Costs, Review your Pricing Strategy – Increased costs weigh heavily on the bottom line. If you’re being pressured by costs, it’s probably time to review your pricing strategy.
Finance – Managing Hidden Evergreen Clauses for Your Benefit – A big frustration for businesspeople in financing and leasing business and commercial equipment comes after they fail to read the fine print in contracts. Commonly found in financing and leasing contracts, evergreen clauses are designed to keep customers committed to an agreement beyond the original term.
“We’ll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”