Home Office: Split Work Expenses

If you're self-employed and work from home, you can deduct some of your home office expenses from your net income on your tax return, reducing the amount of tax you owe. This includes expenses such as utilities, home maintenance, mortgage interest, and property taxes. However, you can only deduct the percentage of these bills that applies to your home office. To calculate this percentage, you can divide the square footage of your home office by the total square footage of your residence. This guide will explain how to split home office work from home expenses using a percentage in QuickBooks.

Calculating the percentage of home office expenses

There are two ways to calculate the percentage of home office expenses that you can use as a deduction on your taxes: the standard method and the simplified method.

The Standard Method

The standard method involves completing IRS Form 8829 to compute the actual amount of deductible home office expenses. The first step in computing expenses is to determine the square footage of the workplace and divide that by the total square footage of your home.

For example, if your home office measures 15 feet by 15 feet, then its total square footage is 225 square feet (15 feet x 15 feet = 225 square feet). If your home has a total area of 1,600 square feet, then 225 ÷ 1,600 = 0.14 (or 14%). This decimal represents the percentage of your total home expenses that can be allocated toward the home office deduction.

After figuring out the percentage of your household expenses that can be written off, you must list all of the expenses that pertain to your entire home, such as mortgage interest, real estate taxes, insurance, utilities, and depreciation for the year, under the "Indirect expenses" section of Form 8829.

Expenses that are incurred solely for the benefit of the office space are then listed under the "Direct expenses" section of the form. The indirect expenses are totaled and multiplied by the percentage derived earlier (14% in our example). Then, the indirect expenses total is added to the total of the direct expenses.

The Simplified Method

The simplified method involves multiplying an IRS-determined rate by the square footage of your home office. To use the simplified method, your home office cannot be larger than 300 square feet, and you won't be able to deduct depreciation or home-related itemized deductions. The prescribed rate is $5 per square foot, with a maximum of 300 square feet.

For example, if your office measures 150 square feet, then the deduction would be $750 (150 x $5). The space must still be dedicated to business activities.

With either method, the qualification for the home office deduction is determined each year, and your eligibility may change from one year to the next.

Splitting transactions in QuickBooks

If you work from home, you can deduct some of your home expenses on your taxes. This means that you can subtract them from your net income on your tax return and reduce the amount of tax you owe at the end of the year. The deduction is based on the percentage of your home that is used for work.

To split transactions in QuickBooks, you must first download a supported browser. You can then categorise your expenses by selecting 'Rent and Lease Expense' and entering the square footage of your home office in QuickBooks Self-Employed. You can also refer to the following articles for further guidance: 'Schedule C and expense categories in QuickBooks Self-Employed' and 'Categorize home office expenses and enter square footage in QuickBooks Self-Employed'.

If you are self-employed, you can also use TurboTax to calculate the percentage of your home office expenses. However, if you manually split the transaction in QuickBooks, you will need to ensure that the percentage matches the percentage used by TurboTax.

Home office deductions for shared spaces

If your home office doubles as a guest room, lounge, or personal area, you can still claim a portion of the space as a deduction. However, you must determine the percentage of time the space is used for business.

For example, let's say your home office takes up 200 square feet and your home is 1000 square feet. The business use percentage would be 20% (200/1000). If the shared space is used for business purposes 50% of the time, you can claim 10% of that space (20% x 50%).

To calculate the deductible amount, you need to determine the percentage of each bill that applies to your home office. This can be done by using the square footage of your home office divided by the total square footage of your residence.

It's important to note that these deductions only apply to the part of your home used exclusively for business. You can't deduct your entire electricity bill but can deduct the percentage that applies to your home office.

Additionally, if you are self-employed, you can deduct a percentage of almost any amount you spend on your home. However, if you claim an expense in another place on your tax return, you can't also claim it as a home business expense.

Keep in mind that you must meet specific requirements to claim home expenses as deductions, and even then, the deductible amount may be limited. For example, you must use the space as your principal place of business, spending more than 50% of your work time there.

When it comes to record-keeping, ensure you keep receipts, invoices, and documentation for any expense you plan to claim. This includes electricity bills, office supply receipts, and invoices from cleaning services. If you pay rent, ask your landlord for a receipt to prove your expenses.

By accurately determining the percentage of business use in your home and documenting your calculations, you can maximize your tax deductions.

Claiming home office deductions

If you're self-employed and work from home, you may be able to claim a home office deduction. This means you can deduct expenses for the business use of your home.

Who Qualifies?

To qualify for the home office deduction, you must meet one of these two criteria:

• Exclusive and regular use: You must use a portion of your home exclusively and regularly for your business. This includes structures on your property, such as a barn or garage.
• Principal place of business: Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients.

You can use two methods to calculate the value of your home office deduction:

• Simplified method: With the simplified option, you aren't deducting actual expenses. Instead, the square footage of your space is multiplied by a prescribed rate. The rate is $5 per square foot for up to 300 square feet of space, with a maximum deduction of $1,500.
• Actual expenses method: This method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.

Other Considerations

• Receipts: If you plan on deducting actual expenses, keep detailed records of all the business expenses you plan to deduct, such as receipts for equipment purchases, electric bills, utility bills, and repairs.
• Home sales: If you're a homeowner and you take the home office deduction using the actual expenses method, it could affect your ability to avoid capital gains tax on home sales.
• Depreciation: If you use the actual expenses method, you're required to depreciate the value of your home. This depreciation is subject to capital gains tax when you sell your home.

Final Thoughts

The rules on tax deductions for a home office can be complex. Consult with a tax advisor or use appropriate online tax software if you're unsure about how to proceed.

Tracking and categorising home office expenses

If you work from home, you can deduct some of your home office expenses from your net income on your tax return, reducing the amount of tax you owe at the end of the year. However, this only applies to the part of your home that you use for business. For example, you can't deduct your entire electricity bill, but you can deduct the percentage of the bill that applies to your home office.

Calculating the Percentage

To calculate the percentage of expenses you can deduct, divide the square footage of your home office by the total square footage of your residence. This percentage can then be applied to your expenses. For example, if your home office takes up 10% of your home's total area, you can deduct 10% of your allowable expenses.

Shared Spaces

If your home office doubles as a guest room or lounge, you need to factor in how much time you spend working in the room. To do this, count the number of hours per day you use the room for work and divide that number by 24. Then, multiply this figure by the area-based deductible expense.

For example, if your home office takes up 25% of your home and you pay $1000 per month in rent, you can deduct $250 as a business expense. However, if you only use the room for 8 hours per day, you can't deduct the full $250. Instead, divide 8 by 24 to get 0.33, then multiply this by $250 to get $82.5, which is the amount you can deduct as a business expense each month.

Exceptions to the Percentage

In some cases, you may be able to deduct a higher percentage for certain expenses. This applies when you use a product or service more for business than for personal purposes. For example, if you run an internet-based business, you may be able to deduct a higher percentage of your internet and telephone services. If you have a dedicated business phone line, you can deduct 100% of the cost.

Record-Keeping

It's important to keep records of each business expense, including receipts, invoices, and documentation. This will help you when filing your taxes and in the event of an audit.

Using QuickBooks

When using QuickBooks, you can categorise your transactions by going through your expenses and selecting "Office Expenses" as the category. You can then follow these steps:

• On the left navigation bar, click "Transactions".
• Search for the expense.
• Choose "Business" as the Type.
• For the Category, select "Office Expenses".
• Press the "View" option next to "Profit and Loss".
• Filter the date range in the upper-right corner.

Frequently asked questions