 QuickBooks Online 2023 tax law business use of your home deduction get ready to earn the skills needed to boost your bank books on up with QuickBooks Online 2023. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page we also include added resources such as excel practice problems pdf files and more like QuickBooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it here we are in our QuickBooks Online test company file jumping over to the income statement remembering we're thinking about situations where we have a sole proprietor who is able to deduct business expenses on their federal income tax return with the help and use of the schedule see how can we then optimize our bookkeeping so that we can make that process as easy as possible we're going to be thinking about this through primarily the use of class tracking you might be able to do a similar process with the tags if you don't have access to the class tracking or if you're using them for something else so keeping this income statement the primary form that we're going to be using for filling out federal income taxes in mind let's think about the rules related to the deductibility of home office expenses for federal income taxes in the united states most of this information is going to come from publication 334 tax guide for small business tax year 2022 you can find this on the irs website if you want to dive into the research in more detail that's at irs.gov irs.gov this is a screenshot of the form 1040 noting that when you're a sole proprietor you will typically need another form a schedule see form which will flow in then to the schedule one and ultimately to page one of the form 1040 line eight that we see here here's part of a schedule see this is the profit or loss from business you can see it's basically formatted as an income statement which is what we're going to be constructing one of the major forms we construct in our financial statements balance sheet and the income statement we're focused here on the expenses but we want to think about those special expenses which are the home office expenses because they're going to have this issue of breaking out those costs that we're paying between business and personal all right so here's the home office business use of your home to deduct expenses related to the part of your home used for business you must meet specific requirements even then your deduction may be limited so to qualify to claim expenses for business use of your home you must meet the following tests so if you have if you whether you rent or you own the home if you are working out of a home and you have a sole proprietor type of business you want to be of course determining whether you can write off some of those expenses and then we have to think about how we can do our bookkeeping to make that process as easy as possible at tax time number one your use of the business part of your home must be a exclusive however see exceptions to exclusive use later so there's always exceptions b regular and c for your business to the business part of your home must be a your principal place of business so you can take a look at the definition of that obviously that's a definitional term b a place where you meet or deal with patients clients or customers in the normal course of your business or see a separate structure not attached to your home you use in connection with your business so now let's take a look at some more detail about some of those tests this is the exclusive test what does that mean to qualify under the exclusive use test you must use a specific area of your home only for your trade or business so it's a specific area notice that you might first think well a specific area means an entire room or something like that but you might be in one of those modern homes where there is no walls walls are are are not cool so maybe so you might not have a physical structure that's actually partitioning and that's where it gets a little bit more confusing so you and you might still say that I have an exclusive space used for my business even though there might not be a physical partition or something like that so you can get into the details on those kind of situations the area used for business can be a room or other separately identifiable space clearly you have to be able to identify the space if it's a whole room that's pretty easy to identify but if it's an oak if it's some other space then it could be more difficult so the space does not need to be marked by a permanent partition so you don't need a permanent partition to designate it but so you do need you do not meet the requirements of the exclusive use test if you use the area in question both for business both for business and for personal expenses so if you do some of your work you know on your laptop in your bed or something like that obviously you can't call that a business office because you know you would assume personal activities happen in that same general vicinity or area so that wouldn't qualify example you are an attorney and use a den in your home to write legal briefs and prepare clients tax returns so your family also uses the den for recreation the den is not used exclusively in your profession so you cannot claim a business deduction for its use so if you're like this is my den this is my office get out of here family i'm doing my work in here then you would think it would probably it might qualify if it was your main office and whatnot your primary place of business but if it's being used for by by the family for general other purposes you would think it would be personal use and not exclusive business use place so exceptions to exclusive use so you do not have to meet the exclusive use test to the extent you use part of your home in either the following ways number one for storage of inventory or product samples so there's a little bit of an exception if you're using it for storage or inventory and you can dive into the weeds on that one if you qualify there or two as a daycare facility obviously if you have a daycare facility you're probably using your entire home and the kids are just running terrorizing your entire your entire place that you possibly use out of the daycare time as your as your home so that's kind of so there might be exceptions just for that particular business of the daycare you can dive into in more detail so for an explanation of these exceptions you can see publication 587 so if you have some of these exceptions you can take a look at that publication you can find the irs website irs.gov irs.gov regular use what does that mean that's one of the qualifications we have to do to qualify under the regular use test you must use a specific area in your home for business on a continuing basis you do not meet the test if your business use of the area is only occasional or incidental even if you do not use that area for any other purpose so if you have like a mansion and you have like one room that no one goes into or whatever and you put an office in there and you like wrote a bill or something in there one time then even though no one uses it for any other purpose because it's you have all these other rooms or whatever then you're not really using it on a regular basis so that that so it's that's wouldn't qualify so principal place of business you can have more than one business location including your home for a single trade or business to qualify to deduct the expenses for the business use of your home under the principal place of business test your home must be your principal place of business for that business to determine your principal place of business you must consider all the facts and circumstances your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements you use it exclusively and regularly for administrative or management activities of your business so in other words you might be in a business that does a lot of stuff outside of your home where you're visiting clients or whatnot or you have another location where you're doing work but when you manage the business you plan on where you're going to go you're doing your your accounting and that kind of stuff that's where it really comes down to it's where the account where wherever the accountant is that's the heart that's the heart of the business so i'm just kidding but you know when you do the administration stuff so you have no other fixed location where you conduct substantial administrative or management activities of your business okay alternatively if you use your home exclusively and regularly for your business but your home office does not qualify as your principal place of business based on the previous rules you determine your principal place of business based on the following factors the relative importance of the activities performed at each location so then you're in this gray area where you have to kind of parse this out if the if the relative importance factors does not determine in your principal place of business you can also consider the time spent at each location if after considering your business locations your home cannot be identified as your principal place of business you cannot deduct home office expenses however for other ways to qualify to deduct home office expenses you can see once again a publication publication 587 which you can find on the iris website iris.gov iris.gov now there are some limits so let's say your home office qualifies so now you've got some deduction possibly but there could be limits to these deductions usually limits with regards to the taxes happen when you have losses because the iris is skeptical of losses when you have losses then the iris doesn't want to pay you for losses they only want to be your partner in the good times they want a piece of your revenue not paying you for your bad decisions so if your gross income from the business use of your home equals or exceeds your total business expenses including depreciation you can deduct all your business expenses related to the use of your home if your gross income from the business uses less than your total business expenses your deduction for certain expenses for the business use of your home is limited so i won't get into the details on that if you want to dive into that more detail you can but from a quick books perspective when we start to populate our quick books when we have a business that has a loss and we start to allocate the expenses it's not gonna we're still gonna have an we're still gonna have to actually do the taxes because the tax software is probably gonna help us then to determine those more complicated situations where we can't just break out the expense using a percent between business and personal because we've been limited to the amount of the loss we can take because we have or the expense we can take because we have losses or limited income all right there's also a simplified method that you can use and we're not going to be when we're thinking about our bookkeeping we're not usually thinking about the simplified method because you oftentimes when you're doing your taxes you'll try to do the simplified method and try to do the actual method and if you're in a high cost of living area like california or new york where i then oftentimes the simplified method is going to be far lesser in value than the actual method so in my experience i haven't i don't typically the simplified method isn't really helpful because it's not going to come up to as big of a deduction but if you're in a cost of living area that is is lower then you might be able to do the simplified method in which case that that's something that you're going to have to do on the tax side meaning as we actually write off or actually it's kind of like it would be kind of similar to us using the the mileage method for our automobiles now we've got this other method other than actual expenses which would mean that we would be recording expenses in quickbooks but then doing this kind of adjustment for the simplified home office kind of method which means we can still use our concepts in quickbooks to do the adjusting entries possibly in quickbooks so we have a nice reconciliation but we wouldn't be able to be breaking out each expenses to kind of to to say what's going to actually happen or tie out to what the actual deductions will be okay but usually i think in my experience the simplified method doesn't seem to be as high as the actual method oftentimes so that means i wouldn't use it in that case so more information for more information on deducting expenses for the business use of your home you could see publication 587 which is on the ira's website so there's a lot more weeds that you can dive into with regards to this in a lot more detail but we get the general idea for our bookkeeping now if you look at the form 8829 expenses for business use of your home so when we think about the federal income taxes what's going to happen we got the schedule c which is in essence an income statement which ties out to the to the profit and loss or income statement we are building and then we've got this other form that we might have to populate if we're using the kind of percentage method of of the home office and you can see here what what it is part one area used regularly and exclusively for business and then the total area of the home and you divide them out so that's the ratio that we're going to be using the area of the home that's for business and then and then you divide it and then you divide it by the total area so let's say that we had like 300 here and this was this was 900 900 oh my goodness that is I can write with a mouse so then you would think pulling out the trustee calculator if I divide these two out you'd say okay there's 300 for my home office divided by 900 so I'm using 33 33.33 is my ratio boom and then if I go and so then and so then this part is figuring your your deductions you've got the direct expenses and the indirect expenses and the indirect expenses like the repairs the utilities and whatnot are the ones that you would think you would be breaking out having 33 percent in this case 0.33 or whatever deductible on uh for deductible the other being personal so that's kind of the idea the concept that we can use uh in in our system right we can say okay well if that is indeed the case then I can either enter all my information into the profit and loss and then make this adjusting entry possibly in a similar way we did with the auto expenses breaking out that 0.33 uh into this tax adjustment so I have this nice little adjustment you know within QuickBooks or as I do the data input within the bank feeds I can have all of my expenses like the utilities and the rent and whatnot broken out between business and this class item to properly allocate the amount that's going to be deducted kind of as we go or if I have both my business and personal in the same system I could be breaking out business versus personal instead of having the tax breakout I can just have business personal and I can use the the classes in that way uh and so those are some uh ways or we could of course wait until we actually do the taxes at the end of the year and figure out what the what the business expense was and then maybe enter it into QuickBooks with this tax adjustment and and possibly print it out so we have this nice reconciliation between what was the bookkeeping number and then the tax adjustments in the event that we needed for like an audit or something like that so we'll look at some of those uh applications and future presentations