You're doing the home office deductions wrong.

You're doing the home office deduction wrong, and it's costing you money in two different ways.Either you're skipping it completely because you're not sure you qualify, or you're taking it in a way that wouldn't hold up with the IRS if they ever looked at it. And that, my friend, puts you in a lose, lose spot. And here's the frustrating part. The IRS actually has clear rules for this.Most creators just don't follow them. So today, let's clean this up and make sure you're doing it the right way.

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Hi there. I'm Ralph Estep Jr. I'm a licensed accountant and I've been doing this for about 30 years now.And I work specifically with content creators to get their numbers clean and help them keep more of what they earn. That's what I do. So here's what I'm going to show you today.First, I'm going to show you how to properly qualify for the home office deduction without guessing or without stretching the rules. Then I'm going to tell you how to choose the right method so you don't leave money on the table or create problems for yourself later.Because, listen, nobody wants problems later on. And third, we're going to talk about when home office expenses actually count. So you know what you should be tracking.And finally, I'm going to end it with a simple checklist that you can use to lock this in and move forward with confidence. Because, hey, we all want to move forward with confidence, right?And listen, if you're feeling overwhelmed already, I'm going to help you get this set up. You can book a call with me right now. Just book a call by going to contentcreators Accountant.com/Helpme. I'm going to give you that one more time.That's contentcreatorsAccountant.com/Helpme. And we'll also put it in the show notes.And if you do that, we'll work on your particular situation together right from the start. Well, let's get started. There really are two rules that matter here. This is what the IRS defines, exclusive and regular use.That's the really the two big things. Is it exclusively used for business and is it regularly used for business? Now, a lot of people would say, well, does the size matter?No, in this case, size does not matter, but defined areas matter and honesty matters. So let Me break this down a little bit deeper. First of all, it needs to be business only space. This is space that's only for business.Your kitchen, if you use it to cook in, guess what? That's not going to qualify. Now of course, if you do a cooking show, well, maybe that would work.But if you're using a bedroom or using some other shared space, that doesn't work, that just doesn't fit with what the IRS is looking for. Now here's the best part of this. Small spaces qualify if they're exclusive.So if you've got a particular rolling your home, a lot of us content creators are doing this at home, or we've got a small area carved out, that is really the key. But it has to be exclusive and regularly used. And listen, honesty is the case here, not perfection.So let's talk about how do you measure it correctly? Because that's where we really need to start.So once you've cleared that hurdle that you have regular and exclusive space, this is not time to estimate, this is time to really measure what's going on. For example, let's say you've got a particular. Let's say you use a bedroom in your home and that bedroom is going to be your content creator space.And that works for me. Is it regularly used and is exclusive. Great. Fantastic. Get your tape measure out and I need you to measure the exact space of that room.Width and breadth, that's what you need to know. How much is the total square footage of that particular room.Then the next part gets a little more complicated because now you've got to look at the total home. Now there's a lot of good ways to do that. If you just recently bought your home, you can go and look at the survey.There's a lot of places online you can go look at the actual square footage of your home. But once you have the office space and the total space, then you come up with what we call a business use percentage.And this is super important because every deduction flows from this number. So let's use a simple example. Let's say Your house is 2,000 square feet. That's the total home size. And you've got a particular room.Let's say it's a 10 by 10 room, so that's 100 square feet. So therefore your percentage will be 100 divided by 2000 or 5%.And see, the more you can be accurate on this, it's going to drive everything later and that accuracy is going to protect your deduction. So once you've Decided, here's a regular exclusive space, here's the amount of space. Now you've got to decide how do I make this deduction work?And there's really two options. There's the simplified method and there's the actual expense method. Now, I don't have to spend a lot of time on the simplified method.You probably get the idea. It's simple, right? That's what it is. It's just a flat rate per square foot. The nice thing about this is it doesn't take a lot of record keeping.It's just bang. Here's what it is. You've got this many square feet, here's the rate per square foot, it's less stress and it's a good starting point.But now here's the problem with that. The other option is what's called your actual expense method. So in my personal opinion, I would look at both of these.So let's talk about the actual expense method. This is where you got that number for that business use percentage. In our example, we use 5%.And then what you do is you apply this to the real home cost for your particular house. And what generally happens. Now it doesn't always happen, but generally happens.When you use the actual expense method, your deduction is a little bigger. But here's the problem with that. You've got to have super clean records. You've got to document it all.It's simplified, is easier, but the actual is potentially bigger, but only if you track it well. Okay, so now we figured out we've got regular exclusive space. We've measured the space and now we've decided on the method we're going to use.Well, now you're saying, Ralph, okay, that's great, but what expenses are included in this? And this is where clarity really matters, because expenses depend on the method. It's only expenses tied to the home.Now, if you're using the simplified method, it doesn't matter because you're just going to take that square footage and use that percentage, use that number that they're giving you per square foot, then you're done. But if you're going to use the actual, then you've got to start understanding what goes into that calculation. So let's get into that.We'll talk a little bit about the main things that go into that. It's all of the expenses that are tied to your house.So think along the lines of your rent, if you rent, or if you pay a mortgage, if you pay mortgage interest. Either of those things are going to be Added to this calculation, you also can add your utilities, things like electric and water, gas.And here's one that you might not have thought about. Internet. That's tied to home use. Now, this is one of those mixed use things.This is one you may want to allocate based on a percentage, not based on the home office deduction, but we could talk about that at another time. Another thing you can add to this is homeowners or renters insurance. Here's a quick tip. If you don't have either, make sure you've got that.But homeowners renters insurance, because it's part of the home expenses, can be added to this to come up with that calculation. Another thing, if you own your home, you probably pay property taxes. Those property taxes can be used for this allocation as well.Here's what a lot of people don't think about. You also can add repairs and maintenance.Now, we'll talk a little bit later about specific repairs, but general repairs and maintenance to your house. Maybe you have somebody that cleans your home, maybe you've got somebody that does the yard maintenance.All those things could be added to these total expenses to come up with that number that you're going to apply that percentage to. And last but not least, and this is not a completely exhaustive list, but any HOA fees, homeowners association fees are also deductible.But if you're going to use the actual, then you've got to start understanding what goes into that calculation. Now let's talk about repairs. Because I said I'd break this out a little bit because repairs gets a little nuanced.Whole home repairs use that percentage that we talked about. So let's go back to our example. We use that 5% that was 100 divided by 2000 5%.So if you're doing general home repairs, let's say, for example, you had a pipe break and you had the plumber come out and fix it, or you had some roofing done. Those are what I will call general home repairs. Those things. You're allocating that percentage now. But here's the beautiful part.If they're repairs directly related to the office only, you might be able to deduct all of them. Let me give you a great example of that. Let's use our example. We had that bedroom that we were using for our content creation.It's basically our home studio, right?Well, let's say all of a sudden you have to replace the walls in there or you've got to replace the flooring or Maybe there's some kind of issue with the ductwork. If it's tied directly to that space, then that repair is directly related to that space.You don't have to allocate that based on a percentage because it's just for that space, which gives you a bigger deduction. Now here's what this does not include. A lot of people get hung up on this one. Do not include these things. Don't include your personal groceries.I'm sorry, if you're going to the grocery store or the farmer's market, that's not a general home expense that you can add to this. You can't add any furniture. Now I'm going to break this out a little bit.If the furniture is used in that exclusive space, then that may be a deduction. But furniture for the house, again, that doesn't go into the cost of maintaining the house.Now if you've built a studio, maybe you've got a cool setup like me, or you've got a couch or some chairs. If that's directly related to the content creation, that's deductible. And basically big up thing.Anything that's upgraded to your house and not related to the office, those things would also not be deductible. If it's not tied to the home, it's generally not deductible. So the big deal here is you're coming up with that business use percentage.Again, you take the square footage of the room you're doing and the square footage of the home. We came up with a number that's our business percentage. And then we, and I'll give you some examples here in a minute.And that's where you take all of those costs that you added up and apply that percentage. So here's an example. Let's say we bump it up a little bit and we say we're going to have a 10% off as example.So maybe in this case you've got a 200 square foot, exclusively regularly used business only place on a 2,000 square foot home, you got 10%. So let's say you do that calculation. You add your mortgage, you add your utilities, you add all of the costs that we talked about.And let's say there was $18,000 in those annual eligible home costs. Well, if it's a simple math equation, even I can do it right. If you take 10% of that eighteen thousand, that's an eighteen hundred dollar deduction.You're thinking, okay, Ralph, what does that mean for me? Here's the beautiful part. That means that $1,800 is money that doesn't get taxed, and that's a good thing. Who, who wants to pay more taxes?Pay your fair share. Pay what you're supposed to pay. Don't try to short Uncle Santa. You're going to end up in jail like Al Capone.That's not what I'm telling you to do, but you can do this, and it's a big tax savings. Use round numbers to do this. Now, let's talk about what I told you at the beginning. I was going to give you a do this next checklist.So let's get right to it. Sort of a recap of what we covered today. Choose an exclusive space. Remember, it's got to be always exclusive and regularly used.If it's mixed use, that's not going to work. I'll give you a great example. I was representing a client one time in an audit, and they had an office and home deduction.And they said, oh, Ralph, this is the only time we use this. It's great. All these kind of things. Well, they end up getting audited. And the auditor asked for pictures of the space.And I said, well, this shouldn't be too hard. So if they saw a desk in there, they saw a computer, they saw printers, and then the auditor on the side said, wait a second, is that a bed in there?And I didn't have a chance to talk to my client ahead of time. And the client says, oh, yeah, well, my grandkids come over. That's where they stay. Unfortunately, not exclusive use. And they lost that deduction.So if you're going to do this, make sure you're removing any personal items, if there's any. Now, listen, you could have a couch in there. It's still tidbit here, right?If your kids are crashing over there, nobody's going to pick it apart if they spend one night on the couch once a week or once a month, something like that. But if you have personal items, take them out of the space.Because one of the things that I tell content creators and clients in general is take good pictures of this, because you may have to justify this to an auditor. Another thing on the checklist, make sure you measure it accurately.I've known auditors to come out with a tape measure and actually measure the space because see what happens. A lot of times people will say to me, Ralph, well, I guess the house is about. Maybe it's about 2,000 square feet.And the room I use, you know, it's probably about 400 square feet. They don't think 400 square feet is a pretty big size room. It's a, that's a 20 by 20 room. So make sure you're measuring it accurately.Again, take those pictures, save those photos. Choose that simplified or actual method. And here's the big takeaway. Keep track of all those expenses.You don't want to try to put this together at the end of the day, you know, keep track of the rent, keep of track. But the interest, the utilities, the insurance, repairs and listen, that's something you should be doing anyway.And if you only do one thing, here's what I'm going to tell you to do. This my key takeaway for today. Make sure you understand the space. Is it defined, is it exclusive and is it measured? So here's the thing.I want to help you get this set up correctly.If you're interested in work with me directly like I said, you can go to content creators accountant.com/helpme again that's contentcreatorsaccountant.com/helpme because this is the kind of stuff that money is left in plain sight and I can help you break that. So I'm Ralph again. I'm the content creators accountant. I'm so happy you join me and make sure you tune in again next week.And we're becoming more ways to do better with your content. Creating accounting work. Have a great day.

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