Office Space

Have you seen my stapler? (photo credit)

After visiting 16 countries in 16 months we are back in Taipei, Taiwan for the next year or so. A rental property we stayed in awhile back was available once again and the landlord was happy to have us move back in. It always pays to be a good tenant.

Even better news, this apartment has a room we used only for storage. So I turned it into a tax deduction.. err, I mean a home office.

What is a Home Office?

Any space in a home can be used for a home office as long as it is:

a) used exclusively and regularly
b) the principal place of business

In our case, the space is an extra room. I could also take over our balcony or segment the master bedroom with a screen divider (sleep on one side, defined workspace on the other.)

The key is the space must be exclusively for work. It can’t also be a play space or a guest bedroom. Work and only work.

This is OK. Jr sleeps with us, so we don’t need a 2nd bedroom (yet.) All of his toys are in a super cool hand made toy box in the living room. (OK, it is really a cardboard box, but it is his favorite toy.)

Best. Toy. Ever.

Best. Toy. Ever. No parking in the office.

Any guests can sleep on our very comfortable sofa. (I vouch for it’s comfort. It’s very nice.)

The other key is that the space must be used regularly. Not daily, not hourly… regularly. I write blog posts regularly. I reply to comments regularly. Now I just do those activities inside these 4 walls. Excuse me, while I step into my office.

Speaking of offices, I have no employer or other location where I’m required to be. Therefore this room is my principal place of business. (Note: employees have additional restrictions on deducting a home office. In this post I’m specifically looking at the self-employed / business owners.)

Meeting all of the requirements for a home office, I am now able to deduct related expenses on our taxes.

Home Office Tax Deduction

The IRS allows two methods for deducting home office expenses.

a) Actual Expenses
b) Simplified Method

We can calculate using both methods and use whichever provides the largest deduction. Or be lazy.

Actual Expenses

To determine actual expenses, it is required to mathematically separate a home into personal and business components. This is done by measuring the size of the work space relative to the size of the total home.

A 200 sq. ft. office in a 2,000 sq. ft. home is able to deduct 10% of actual home ownership costs as a business expense. This includes mortgage interest (or rent), insurance, utilities, and more… even depreciation. See IRS Publication 587 for the juicy details. Or if you dislike IRS docs, TurboTax has a summary explanation. (Depreciation can be messy business, so be sure to understand the implications. This is one reason we intend to be Renters for Life.)

For homeowners, high mortgage costs and deprecation can generate insanely large home office deductions, only limited by the profit of the business. (It isn’t OK to generate paper losses to offset other income.)

One important point with this method: keep extensive and detailed records. Personal Capital is a free tool that we use to track all of our business and personal spending (affiliate link.)

Personal Capital expense tracking

Personal Capital expense tracking. Business Expense tag

Simplified Method

Maybe that seems like a lot of work, and you would prefer an easier method.

How much is 1 sq. ft. of your home worth? The IRS says $5, with a maximum size of 300 sq. ft. (This is especially cool if you live in a really low cost of living area.)

Take the size of the home office, multiply by 5, and that is the total home office business deduction. A 200 sq. ft. office is worth a $1k deduction.

Simple. And Lazy… I like it.

My New Office

My new office is cozy, about 100 sq. ft. (146.5 in x 98.5 in.) The $2 measuring tape I purchased is also a tax deduction, since I couldn’t calculate my home office deduction without it.

Documentation

Documentation

Unfortunately using the simple method I can only get a deduction of $500 (~$42/month.) But our rent is $1000/month and the office is a full 10% of total square footage, for a monthly deduction of $100.

I can also claim 10% of all of our utilities, except primary landline phone (which we don’t have.) That varies based on A/C usage, but AFAIR last time in this apartment it averaged ~$100/month. 10% or $10 of this is tax deductible.

Our housekeeper also spends 10% of her time cleaning the home office. $15 of the ~$150/month cleaning bill is also a deduction.

By using the Actual Expenses method, and keeping extensive and detailed records, I can deduct ~$125/month. It looks like I’ll be keeping records after all.

One important record, particularly if you move often, is photo evidence.

Home Office Tax Deduction

Before

Man at Work, Business as Usual

Man at Work, Business as Usual

Tax Savings

With a 15% marginal tax bracket and 15.3% SE Tax, a $100 deduction saves a real $29.15 in taxes (1/2 of the SE Tax is income tax deductible.)

Or… for every $100 deduction at the 15% federal marginal rate, I can increase the size of our annual Roth IRA conversion by ~$195 with no difference in tax due. (The deduction saves both SE and Income taxes, whereas the Roth conversion is only subject to income tax.)

With a $125 monthly deduction we’ll save ~$36 in tax (~$440 annually.)

Summary

By exclusively and regularly using a dedicated space in your home to conduct business, the rent or ownership costs of that space can be deducted. In our case, it is an extra room. It could also be a partitioned corner of a larger room with a screen divider (also tax deductible.)

The home office deduction is a great way for business owner’s (aka side hustlers and the self employed) to reduce their Self Employment and Income taxes.

Do you have a Home Office? Can you make one?


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