So in our first bite size less than we're going to cover the home office deduction. Now if you work from home and you can claim a deduction for a home office if you have a space at home that you use exclusively and regularly for your business, okay, so this is not to say that an entire room has to necessarily be dedicated solely to your business, but the area that you use that you do use for your business cannot be used for any other purpose. For example, your home office can't double as a family room. Also, if what you do includes you having to keep or stock inventory, or samples for your business, then you can actually deduct an area in the house that you use exclusively to store your samples and to store your images. I have clients that came to me after several, several years of working for themselves, and they never realized that they can actually take a home office deduction.

So I just would like to let those of you listening to this lesson. Know that if you do work from home, you can take a home office deduction. And the great thing about that is it helps you reduce your overall taxable income. And most of us are in this game to try to make sure we pay as little as we can to the IRS as possible, as long as what we're doing is legal. So now the question is how do you determine how much you are you are allowed to deduct for your home office? Well, there are two ways of making that determination.

One is using actual expenses and one is using just something called the Safe Harbor, which is basically a standard It's universal. with actual, you're actually taking a portion of your, of your homeowners, your rental homeowners or your rental insurance, your mortgage interest, if you have a home or your rent if you have if you're renting, or renting an apartment, also your property taxes, if you own the home, and any repairs and maintenance and also utilities. Now you only get to take a portion of this depending upon the percentage that you use, the percentage of the home that you're in that you actually use for your business. So let's look at a visual. In this scenario. The square footage of the home is 3900 square feet and the square footage that that is used as the home office is 350 square feet.

So what you'll do is you'll take the 350 and divided by 3900 and that gives you 8.97% that means that 8.9% 8.97% of the home as a whole is what is being used as home office as the as the home office. That means that all of the eligible expenses that you can use as an as a home office deduction will have to be multiplied by 8.97 to give you the total amount that you are allowed to deduct. Now, I'm just giving you this as an example. Because this if you decide to go with an actual rather than a standard, that's something that your tax preparer or your accountant should help you with. I don't suggest you do that by itself because it might get a little bit confusing. So you'll need somebody who understands how this works to actually help you with that.

We're going to first show you how calculating the actual home office deduction works and then we'll discuss how to use the standard. As you can see, so far Jennifer has recorded rents in the amounts of 72 hundred dollars as of today, she's also she's He has also recorded utilities for $665 as of today, now, let me inform you of something, even though so far $7,000 has been recorded as rent, and $665 has been recorded for utilities. These amounts do not show up on the profit and loss statement. I repeat these amounts will not show up on the profit and loss statement. Because all QuickBooks self employed is actually doing is just recording what the actual your actual expenses are going to be for the entire year. So that way, when you send the report to your accountant or tax preparer, they're going to look at the actual and look at the standard and they're going to make the determination which one works best for you or rather, which method would give you the highest deduction.

So before we calculate it, calculate a percentage. Let's go look and see what you would need to do if you were recording a transaction for your home office. So the first thing we'll do is we'll go to the transaction screen. And then we'll click on Add transaction. For the description, let's say water bill for those of you paying the water bill, and the amount is $100. Now when we select a category, we have to make sure that we choose the category that has home office in parentheses.

So in this case, we're paying the water bill. It is a home office deduction, so we're going to have to use the option that has home office in parentheses. And the reason why this is very important is because if you use a utility option that does not have home office in parentheses, it's going to wind the transaction is going to wind up on the profit and loss statement. And remember, Home Office deduction Do not appear on the profit and loss statements. So it's very important that you pick the transaction that has home office that has home office in parentheses. Now let's assume this was rent.

Now since we don't see rent as an option, in the shorts category section, we'll just go to the search bar, and we'll type in rent. And as you can see, we have two options for rent, we have rent and lease. And then we have rent and lease home office. If we pick rent and lease, it's going to show up on the profit and loss statement. So who are paying rent, and we're working from our home, we would want to pick rent and lease with the home office in parentheses. Now, in this case, a payment water bill.

So let's change that to utilities. So we're going to pick the utilities with home office in parentheses and not this one, too. We'll pick back and then we'll stay there. Now let's go back to the Schedule C screen. Now you can see that for utilities for this scene that is December 31. And we have nothing else to add in terms of home office deductions.

So for the year, we have $7,983 as a home as a home office deduction for 2017. Now remember, we discussed the percentage amount that was used for the actual home office deduction. In our example, we use 30 $900, I mean, sorry, 3900 square feet as the total square footage, and I think it was 390 for the actual home office space that is used for the for the home office. So the percentage came to 8.97. So if using that same example what we'll do is we will take the 8.97. And we'll multiply it by the 7983.

And that's going to give us the amount of home office deduction that we qualify for 2017. So let's see what that winds up being. So we have not 7980 CSV multiplied by 8.97%. That gives us a total deduction of $716 for the year. So this means that for 2017, all we can deduct, as a home office deduction is $716. And this number is based on the $707,980 that we paid for utilities and rents for the home.

And we took the percentage of the home that we use the percentage of the home We use as home office, we took that percentage and multiplied it by this number, and it gave us the $716. Now, I will say, I don't suggest you do this on your own, I definitely use it, I definitely suggest that if you decide to go with the actual expenses rather than the standard expenses that you consult, or you speak with your accountant, or your tax preparer to make sure that you're getting things right. If you decide to go with a standard deduction, the most that you can deduct every year is 1500 dollars. So you can't deduct anything over 1500 dollars. And the way that 1500 dollars is calculated is $5 multiplied by 300 square feet. So the standard amount per square foot is $5.

And the maximum amount of square footage that you are allowed to deduct is 300 square feet. So even if you works in an area that was, let's say, 600 square feet, and you choose to use the standard deduction. Well, 600 times five is $3,000. But you won't be able to take the whole 3000, you're going to be limited to 1500 dollars. So let's see how all this works. So let's say for example, you have only 100 square feet that you work out of.

So then when you're setting up this particular area for the home office deduction, you're going to click on you're going to pick the 100 square foot. And as you can see, when you pick 100 square feet, all you get his $500 for the year 100, multiply by five gives you 500. So you'll get a standard deduction of $500 for the entire year. If the area that you work in or the area that you store your products, whether it be inventory or samples, if it's 200 square feet, then as you're setting this up, you're going to Choose the 200 square feet. As you can see, when once we click on the 200 square feet radio button, we can now see that our standard deduction for that year is going to be $1,000. And lastly, if you confuse me, if you know the area that you work in is 300 square feet or more, then you will you choose the 300 square feet radio button, and then you'll get the 1500 dollars in deduction for the gear and as I said, that is the most you can get.

So even if you even if you're the area that you work in, or the area that you store your products in is 800 square feet, you're still going to click on the 300 square feet radio button. Now if the area that you work is neither 100 200 or 300, let's say it's something in between zero and 300. Then you just have to click the other radio button. When you click the other radio button, then you will stay okay My square footage is 250 people just type in the 250. And it's going to let you know that you will get at the end of the app $1,250 in the In Home Office deduction. It's as simple as that, really.

So that's all you have to do when you're setting up your QuickBooks self employed, and setting up the home office deduction area. In the next lesson, we're going to learn how to set up our business assets so that we can get deductions at the end of the year.