How the Home Office calculation works

From: Business School 101

and Alamo Bookkeeping Associates

Here is how it works. You take the total square footage of your house. Then you calculate the square footage of the office space you are using, whether this is a separate room or an area of a room. Lets say you are using a 10 foot by 10 foot room and your house is 1000 square feet total. The area you are using is 100 square feet (10 times 10).

Take 100 divided by 1000 and you get .10 or 10 percent.

Then you total all your expenses listed. For example.

Electricity 2000, Water 500, Insurance 1000, total 3500.

Now take the 3500 and multiply by .10 (10 percent).

You get to deduct $350.00 for your home office on your tax return as an expense. This may not sound like much but as they say, every little bit helps.

Most people don't actually enter this number on their accounting books, they put it on the personal tax return. However, the moral of the story is, keep your utility and insurance bills. Don't throw them away if you have a home office.

Next: So how do I set up a set of books?

What is a home office expense?

From: Business School 101

and Alamo Bookkeeping Associates

So what exactly are considered “Home Office” expenses?

1st let's begin with whether you should claim a home office. The plus is that it becomes a deduction on your tax return. However depending on the size of your house this may end up being just a few hundred dollars for the year, if that. The drawback is that if you sell your house, you have to recalculate the amounts you expensed for depreciation of the home and add that to your gain, if you have one. In other words, you may have to take back the depreciation expense you deducted each year on the house when you sell it. This is called recapture. You can however, deduct other expenses and leave out depreciation on the home.

If you decide that you are going to expense your home office. Then the information you need is the following:

The purchase price of your house if you choose to depreciate. You can also choose not to depreciate, in which case you don't need the purchase price. At least not now, you will need that if and when you sell your house in the future.

The total square footage of your home.

The square footage of the room or space you use for your office.

Interest on the house payment.

Insurance on the house.

Repairs and maintenance on the house and/or on the actual office space in the house.

Utilities.

If you are renting the house then you would use the rent payment instead of interest and depreciation.

Next: How the actual home office calculation works.

A Tricky Thing called Office Expense

There is a tricky type of expense called "Office Expense". This item is mostly interpreted as the place/location you work out of. This can be an office location you are renting, or it can be a room in your house if you don't rent an office space outside your home. However for tax purposes, "Office Expense" actually encompasses a bunch of other type of costs pertaining to running your office. For example, your internet service can be considered an office expense. Also supplies you buy, such as paper plates, cups, toilet paper, etc are part of your office expense. Office supplies such as ink, paper and other types of office supplies can be part of your office expense. For IRS purposes you can group this bunch together as Office Expense. However most business people want to keep track of these items separately for bookkeeping.

Now, if you are renting office space, obviously you are going to track the rent payment as your office expense, or maybe you will call it office rent. The choice of description for this item is yours when you set up your books. For IRS purposes, it is considered rent expense.

The problem comes in when the office you use is in your home. The IRS rules state that the room you use should be a separate area in your house. It does not necessarily have to be a separate room, just an area within your house.

Now, just how would you track this for bookkeeping? The answer is that most small business owners who are working from their home office do not enter this as a separate expense on their books. They simply calculate that when tax time comes.

Next, what exactly goes into the calculation of a home office?