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New Home Office Deduction for the Self-Employed

13 Thursday Feb 2014

Posted by Erin Louis CPA, Advocate Accounting LLC in Self-Employment, Taxes

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Deductible Business Expenses, Home Office Deduction

Beginning with tax year 2013, the IRS is offering a Simplified Method for deducting expenses related to business use of your home.  This is a welcome change since this deduction has confused so many taxpayers.  Most of us don’t know whether our home office qualifies, or, if it does, how to take the deduction.

What Qualifies as a Home Office?

There are four basic tests that determine whether your home office is a qualifying home office.

  1. Exclusive Use – You must use this part of your home exclusively for business.  If you have a home office that you sometimes use for your business, its expenses are not deductible.[i]
  2. Regular Use – The business use of this part of your home must be regular. It cannot be occasional or infrequent.
  3. Trade or Business Use – This part of your home must be used in connection with a trade or business.
  4. Principal Place of Business – This part of your home must be your principal place of business. A home office is automatically considered the principal place of business if there is no other work location, if there is no other work location for administrative duties, if it is a location for meeting clients or if the home office is a separate structure such as a garage or studio.

How do I deduct Home Office Expenses?

There are now two methods for taking the tax deduction and taxpayer’s can choose, each year, which one they will use.

  1. Standard Method – Under the standard method a taxpayer deducts a percentage of certain household expenses. The deductible percentage is based on the square footage of the part of the home used for business as compared to the total square footage of the home.  These expenses are calculated and reported on Form 8829.
  2. New Simplified Method – Beginning with 2013, taxpayers can forgo all the calculations and just take $5 per square foot of the home used for business.[ii]

What expenses are deductible using the Standard Method?

Expenses are divided into “direct” and “indirect” expenses. Direct expenses are those that only benefit the part of the home used for business and indirect expenses are those that relate to the entire home. For example, painting the home office would be a direct expense while utilities would be an indirect expense.  Here’s a list of the most common home office deductions:

  1. Mortgage Interest and Taxes if home is owned
  2. Rent if home is rented
  3. Utilities
  4. Insurance
  5. Security
  6. Telephone

Which method should I use?

In most cases, a home owner will want to use the Simplified Method while a renter could go either way depending on the size of the home office.

For a home owner, the Simplified Method has an added bonus. The $5 per square foot is designed to give the taxpayer a deduction similar to what they would come up with if they used the Standard Method.  If using the Standard Method, a home owner would include their mortgage interest and real estate taxes to calculate that deduction.  If the Simplified Method is used, a taxpayer may come up with a similar deduction (to what would be calculated using Standard Method) AND still be able deduct their mortgage interest and real estate taxes as an itemized deduction on Schedule A. This allows for double dipping of deductions for the home owner.  A renter does not receive the same benefit. Unlike mortgage interest and real estate taxes, rent is not otherwise deductible.

As always, there are other factors to consider in choosing which method to use and each taxpayer’s situation is different.[iii]  The important thing is, if you just don’t want to deal with it, all you have to do now is take the square footage by $5 and you have your deduction. Easy as pie.


[i] There are two exceptions to this test. The expenses can still be taken if this part of your home is used to store inventory or if you use part of your home as a childcare facility.

[ii] There is a maximum deduction of $1,500 (300 square ft.)

[iii] The Simplified Method also has an effect on depreciation and carry-overs.

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5 Commonly Missed Business Deductions for Sole Proprietors

23 Friday Aug 2013

Posted by Erin Louis CPA, Advocate Accounting LLC in Self-Employment, Taxes

≈ Comments Off on 5 Commonly Missed Business Deductions for Sole Proprietors

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Charitable Contributions, Food and Meals on Premises, Home Office Deduction, Meals and Entertainment, Self Employed Health Insurance, Small Employe Health Care Credit

New business owners are often unprepared for the tax that comes along with self-employment income.  With wages, which are subject to federal income tax, Social Security (SS) tax and Medicare tax, the burden for the SS and Medicare is split between the employee and employer.  Those who are self-employed must pay both portions and it can come as a big surprise if you don’t plan ahead.

It is important to document your deductible expenses to protect yourself in the case of an audit.  Knowing what is deductible in the first place will help you make sure that your expenses are documented appropriately.  Here are some business deductions that are frequently missed.

Deduction for Business Use of the Home (Home Office Deduction)

If you use a portion of your home exclusively for business[i], you can take a business deduction for various expenses.  If you use the traditional method, you are able to deduct a portion of expenses such as insurance, utilities, mortgage interest and property taxes. The deductible amount is a percentage of total expenses and is based on square footage of the home office as compared to the total square footage of the home.

For 2013, a new “simplified” method is available for the home office deduction.  The new method allows for a flat $5 per square foot of home office space, up to 300 square feet maximum.  This new method lessens the administrative burden for the taxpayer.  A second benefit of the simplified method is that you can take the $5/square foot and claim 100% of your home mortgage interest and property taxes along with your other itemized deductions.

Under either method, a taxpayer will receive a home office deduction of $1,500 or less. The real benefit of establishing a home office is an increase in deductible vehicle expense (mileage).  When tracking business miles, commuting miles don’t count. Business miles only include travel from the main office to a secondary work location, or between multiple work locations. Travel from home to main office doesn’t qualify. But, if you have a home office, travel between home and the office is now travel between two offices.

Food and Meals on Premises

Business owners can deduct the cost of “Meals and Entertainment (M&E)” with clients, prospective clients and employees.  This category of expenses includes any meal and entertainment expense incurred during, directly preceding or directly following conducting business and they are 50% deductible. There is a similar deduction called Food and Meals on Premises (FM), except these expenses are deductible in full.  The distinction is location; on premises refers to in office.  Below are some examples of each of these expenses.

  • Meals and Entertainment

♦ Lunch with a potential client at a local restaurant to discuss your services

♦ A concert with a client immediately after a business meeting

  • Food and Meals on Premises

♦ Coffee and cookies purchased for your office reception are

♦ Food provided for a required in-office staff meeting

Small Employer Health Care Credit

Considering the coming implementation of the Affordable Care Act, this is one credit employers must know about.  For tax years 2010-2013 eligible employers can get a credit of up to 35% of premiums paid for employee health care. The maximum credit amount is scheduled to increase to 50% in 2014 and to apply to premiums paid to a Small Business Health Options Program (SHOP) Marketplace.

You may be an eligible employer if you pay 50% of the cost of single coverage for your employees and you have fewer than 25 full-time employees who are paid an average of less than $50,000/year. If you aren’t able to realize a benefit from the credit, you are allowed to carry the credit forward to a future year.

Charitable “Contributions” that are actually Marketing Expenses

Charitable contributions are a personal itemized deduction going against ordinary income.  Don’t confuse this with marketing expenses, a common and costly mistake. If you receive any benefit in return for your donation it is not charitable it is marketing, and that’s a good thing. Marketing is a business expense going against self-employment income which is taxed at a higher rate than ordinary income. In other words, a business deduction (marketing) is more beneficial than a personal deduction (charitable contribution).

For example, if you give money to a non-profit and they put your name on a banner or in a brochure, that’s an advertising expense, despite the fact that the money was given to a charitable organization.  Deduct this on your business’ Schedule C, not on your Schedule A for itemized deductions.

Self-Employed Health Insurance

Self-Employed taxpayers are allowed an above the line deduction for qualified health insurance premiums paid for the taxpayer, spouse, or dependents.[ii]  Above the line means that the deduction is calculated before arriving at Adjusted Gross Income (AGI). While the deduction is limited to the net profit from the business, most taxpayers do not reach that limit.

The ability to deduct the cost of health insurance as an adjustment to income, instead of an itemized medical deduction on Schedule A, is highly advantageous. Medical expenses deducted as itemized deductions are subject to a much steeper limitation. They are only deductible to the extent that they exceed 7.5% of AGI. For most taxpayers, the 7.5% rule means benefit is only realized in years where an unusually large medical expense such as surgery is incurred.


[i] There are some exceptions to the exclusivity requirement.

[ii] The IRS has not yet made comment on the Windsor decision about how they will define “spouse” for 2013 and beyond.

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