Teaching Tax Flow: The Podcast

In Episode 192 of the Teaching Tax Flow Podcast, hosts Chris Picciurro, CPA and John Tripolsky revisit the often-overlooked, yet crucial, topic of the home office deduction. Designed to demystify the complexities surrounding this deduction, the episode provides listeners with essential information on legal requirements, potential audit fears, and the strategic application of the home office deduction in tax planning. Whether you're a self-employed individual or a tax professional, this episode offers valuable insights relevant to your tax strategies.

Chris Picciurro, CPA sheds light on the IRS requirements for qualifying for the home office deduction, emphasizing the importance of regular and exclusive use and the identification of one's principal place of business. The discussion further covers the difference between the simplified method and the actual expense method, showcasing how taxpayers can maximize their deductions. For those concerned about potential audit risks, Chris and John highlight that the home office deduction is not as complicated or risky as it seems, urging eligible individuals to consider taking advantage of it.

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  • (00:02) - Understanding the Home Office Deduction and Its Misconceptions
  • (03:57) - Understanding Home Office Deductions and Exclusive Business Use
  • (07:52) - Understanding Home Office Deductions and Expense Methods
  • (11:38) - Understanding Home Office Deductions and Tax Implications
  • (18:10) - Maximize Tax Savings with the Home Office Deduction

Creators and Guests

Host
Chris Picciurro
Founder, Teaching Tax Flow
Host
John Tripolsky
VP of Marketing, Teaching Tax Flow

What is Teaching Tax Flow: The Podcast?

Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.

Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.

In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.

Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.

Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com

John Tripolsky:

Hey, everybody. Welcome back to the Teaching Tax Flow podcast episode 192. As I said a few episodes ago, we're revisiting an old friend, and we're going back looking at the home office deduction. So basically, the home office deduction explained. Now what exactly that means, you probably heard of it, took advantage of it, but do you know exactly what it is or even more importantly, what it is not technically?

John Tripolsky:

We're gonna talk about it. So whether you're listening to this at your home, in your office, maybe home office, I have to go ahead and say that, in your car, walking a dog, anything like that, you are gonna wanna listen to this one because I would wager a bet that this is probably one of the most, maybe not misunderstood topics, but maybe something that's almost so common people forget about it. Right? So let's hear about this one. Chris Picciurro, welcome back to your own show, sir.

John Tripolsky:

Let's talk home office.

Chris Picciurro, CPA:

Well, thank you. And I'm recording this from my home office, which is we're gonna explain today why this qualifies as a deduction. And one of the reasons we wanna revisit this, John, we look back, it had been over three years since we had an episode on home office. And over that time, we've expanded the reach and the community at Teaching Tax Flow, and I can it's very, very, very common that taxpayers do not take a home office reduction when they're absolutely entitled to it in fear of an audit or in fear that they that they're not that they're just mostly in fear of an audit for and I and I it just this was one of those things. It's up there with my frustration on misuse of an s corp.

Chris Picciurro, CPA:

Right? Yeah. But so we're gonna be we're here to help guide you and make sure that the taxpayers understand, and tax professionals too, what qualifies for home office and when you should take it. So absolutely excited about this one, and this is one of those that this home on home office deduction could be extremely valuable for somebody. And you should take the home office deduction if you're entitled to it.

Chris Picciurro, CPA:

Why pay more tax?

John Tripolsky:

Great. And you're right. And you know what's ironic about this, right, is, like you said, so more people miss this, so they're afraid to take it. But yet there's less fear in doing something something else. Right?

John Tripolsky:

We won't say anything specific, escort, any of this stuff, that is actually much more troublesome in some sense, if not done correctly. Right? So it's kind of ironic a little bit. Like, this is so simple, and it's right there in front of them, but yet sometimes their focus is on something else they think is more impactful. So let's let's explain this one and debunk some stuff.

Chris Picciurro, CPA:

Right. So let's talk about what the IRS requirements are, and and I wanna backtrack. As you know, John, I spent a few years as a tax season updates instructor for the National Association of Tax Professionals. Enjoyed meeting other professionals, and I'm not saying that to to pat myself on the back because I didn't put together the materials they did. And they're really good materials.

Chris Picciurro, CPA:

I'm saying this because we had about a two hour block couple years ago just on home office. So if tax professionals are spending that much time teaching each other and talking through this, it is a common misconception not only for taxpayers but tax professionals as well. So let's jump into it. Home office reduction. What are the IRS requirements to qualify for that home office reduction?

Chris Picciurro, CPA:

Now we understand a lot of times there's there's black, there's white, and there's gray. Right? We want to make sure we're legally and ethically reducing the tax we pay in our lifetime. So think about your space that you're working in and if it's gonna qualify for this. Or if it's a space that might not qualify, is there something you can change about the space to make it qualify?

Chris Picciurro, CPA:

I want you to remember also, home office doesn't have to be a specific room. It could be a portion of a room or a portion of a space. The requirement is it has to be a regular and exclusive use for business purposes and your principal place of business. So, John, I'm gonna talk about our my space very transparently. Yes.

Chris Picciurro, CPA:

I leave my space. I leave my home office to do meetings once in a while, probably grumpily. Right? Unless I'm going to play pickleball, then you know I'm pretty happy to

John Tripolsky:

When you do have to leave the leave the office there, you you make a point. You're not in the best mood sometimes.

Chris Picciurro, CPA:

But sometimes I'm like, oh gosh. I love people, but, you know, I'm

John Tripolsky:

getting comfortable here. So

Chris Picciurro, CPA:

Yeah. I do business other places. Right? As as you know, we travel. We we go to client meetings and etcetera, etcetera.

Chris Picciurro, CPA:

But this is by far my principal place of business. I do about 90% of the business right here in my home office. It's so that's it's regular use, and it's exclusive use. So for me, we decided to build a apartment above our garage a few years ago. One of the and it's a two bedroom apartment.

Chris Picciurro, CPA:

One's the John Tripolsky suite when he visits us here in Franklin or guests or friends, but the other bedroom is specifically a home office. I don't have a bed in here. I don't have an inflatable bed. John has helped me appoint this place really well as a podcast studio. I've got a whiteboard.

Chris Picciurro, CPA:

So if you've watched any of our teaching textile videos, clearly, this is exclusive use here for for business. Now do I walk downstairs sometimes and return emails at the kitchen table with a coffee? Absolutely. I do that multiple times a week, but this is still my principal place of business. Do I get to deduct some of the kitchen?

Chris Picciurro, CPA:

And, John, quite frankly, we've recorded a bunch of quick tips in our in our family's kitchen talking about tax tips, and we have a lot of cool visual aids about marginal rates and tax extensions with coffee and all this cool stuff. Can I deduct my kitchen? No. Do I use it for business? Sometimes.

Chris Picciurro, CPA:

Is it my regular place? No. Is it exclusive use? No. Our family.

Chris Picciurro, CPA:

Of course, John, we've got three teenagers, so half the time we're sitting on the couch or runner. You know, we don't eat altogether as much as we'd like to, but the kitchen area is not my principal place of businesses. It does not eat. Do I use it for a business? Yes.

Chris Picciurro, CPA:

Does it qualify for a deduction? Absolutely not. But the space does.

John Tripolsky:

And I so I hope And with that too, can see a lot of people oh, no. Go ahead. Go ahead. I'm sorry.

Chris Picciurro, CPA:

No. I'm driving into my virtual situation. So people can a lot of people have these situations. Like, they might store inventory in their garage. They wanna deduct a portion of their garage, which is fine.

Chris Picciurro, CPA:

But you can't deduct your entire garage if you got a vehicle in there, if you've got, you know, couple motorcycles and you've got, you know, sports equipment and that sort of stuff.

John Tripolsky:

Right. And I I've heard of this a bunch of times where people say, well, I have a home office. I use this room. It used to be a spare bedroom. We convert it into an office.

John Tripolsky:

That's perfect. But then Mhmm. Every once in a while, I I forgot who said this at some point, and you had a really direct I think kinda chuckled at them a little bit when they answered their own question. But I think they said that, you know, once a month or something, have a meeting at their dining room table or their kitchen table. So what percentage of that room could they deduct?

John Tripolsky:

And I think you asked that question, like, well, is it exclusive? You know, what do you I forgot how you worded it. And this was probably four plus years ago. And it kind of answers itself. Right?

John Tripolsky:

Like, it's not intended for that even though you use it. Like, you can't deduct your bathroom because you like to take a shower and talk on the phone at the same time. You know? Right. You can't do it.

John Tripolsky:

Right? So that to your point of your own kitchen.

Chris Picciurro, CPA:

Mhmm. Right. And I could I could even be renting a, a space where I go twice a month. Let's say if I have a client meeting, it's it's a coworking space or an entrepreneur incubator, and I don't have a desk there. I just rent the office.

Chris Picciurro, CPA:

Because if I let's say a boardroom or, you know, but this that doesn't mean I can't take a home office because this is my remember, this doesn't have to be my only place business, but it clearly has to be my principal place of business. That's that's the that's where where it comes down to. Now let's assume I'm self employed. We'll touch a little bit on s corps and c corps, or let's say I'm a partner in a partnership, and I'm deducting my home office as a UPE, unreimbursed partner expense. Let's I have two options.

Chris Picciurro, CPA:

Right? I can take the simplified method and the actual expense method. Now the simplified method so we've established that you have a home office deduction. The IRS says, we're gonna give you a simplified method similar to a standard deduction. However, it's not as generous as the standard deduction standard mileage deduction, sorry, for for vehicles.

Chris Picciurro, CPA:

So, without having to track any of your utilities expenses, your rent expense, your mortgage interest. Oh, by the way, little nugget, you don't have to own a home to take the home office deduction. You could be renting a home today and take the home office deduction. But the simplified method says, IRS says, alright. If you have a qualified home office, we're gonna give you a $5 per square foot deduction up to 300 square feet, so the maximum deduction is 1,500 Not the most generous, but at least it's a deduction and it's, you know, it's easy to administer.

Chris Picciurro, CPA:

You don't have a lot need a lot of documentation. You don't have any depreciation to take on your home. And one of the reasons that this is attractive is that if you're taking the standard if you're taking the mileage deduction or deducting a vehicle, we know that commuting miles are not deductible. But if you establish a home office and then you have miles leaving from that home office, now those are deductible. So even though the value of the home office deduction tax wise isn't high as far as the home office deduction, the value it gives you to establish that's your principal place of business and when you leave there, gives you that mileage deduction is valuable.

John Tripolsky:

Here's a question, actually.

Chris Picciurro, CPA:

I'll throw you

John Tripolsky:

first No. No. Go ahead again. Sorry. No.

John Tripolsky:

My my mind's racing here, I cut you off again. No. You go ahead, and I'm then I'll share

Chris Picciurro, CPA:

my You can take simplified, the $5 a square foot, max of 1,500, or you could take the actual expense method. In the actual expense method, we are measuring the square footage of your home office and dividing that into the total square footage of your home to come up with a percentage. We take that percentage against your expenses. What your indirect expenses. What does an indirect expense mean?

Chris Picciurro, CPA:

Utilities, insurance, property taxes, repairs, mortgage interest, depreciation on the home, rent, any of the things that are indirect to the house. Now you also could deduct direct expenses. So that could be Internet, but you're you could have an indirect expenses in Internet. So real example in my for me, as you know, John, because you help help with this. We have Internet for the house.

Chris Picciurro, CPA:

That would be an indirect expense for me. We got a separate provider specifically for my home office of Internet that we that we don't have the kids' devices on it. Why? Because I need as fast as Internet and possible as possible, and I can't I can't have eight other devices for TVs and refrigerators on the Internet for my work, and I need it super fast. So we have a special Internet.

Chris Picciurro, CPA:

So that for me, that's a direct expense. But if you just have one Internet, then it would be an indirect expense expense. So you've gotta identify direct versus indirect expenses, and you can take those indirect expenses multiplied by the the home office section. Now I'm gonna say there are some there are some nuances. Right?

Chris Picciurro, CPA:

Some unique situations when it comes to day care, where it comes to you built a barn and and you use the entire barn as a as a business expense. And it's really not a home office. That's a separate separate dwelling or separate unit. So a lot of times facts and circumstances come into play, but for the vast, vast majority, you got the simplified method or the actual expense method. And I want you to think about for clients or taxpayers in those really expensive states, those high tax states, the simplified method's probably not gonna make sense.

Chris Picciurro, CPA:

If you if you rent an apartment in Manhattan and, you know, probably not the least cheap but let's say you bought you have the the ability to rent a two bedroom apartment in Manhattan and you use one of the apartment, one of the bedrooms as a home office that qualifies, it's probably gonna be, like, 40% of your living space. So the deduction's gonna be 40% of your rent, 40% of all these so it's gonna be much more valuable there when you look at but if you have live in more a more rural area and you have a 4,000 foot square home and a 150 square foot home office, even though you have a your house is expensive to maintain, you're only getting a sliver of that. So, again, that's where it comes into play as far as planning around, you know, when how to take that home office deduction.

John Tripolsky:

And you pretty much answered the question. The example I was gonna bring up, say somebody has well, here, we can make it even a little bit more of a curveball for you. So I can leave you hanging. So if somebody has, say, a detached structure that's their home office, it's on their property. Right?

John Tripolsky:

So that that would qualify if it's exclusive use. So that you probably it's probably gonna be more than 300 square foot, so they'd probably do the actual. And then they have maybe another random spot in their home that they use for something else business related, and then something else. So you're basically taking the sum of those three, putting it together against the overall square footage. Right?

John Tripolsky:

Like, it doesn't have to be, quote, unquote, one box.

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Chris Picciurro, CPA:

You could, but if you have a separate dwelling, so, for instance, we let's say you have a client is a, our taxpayer, that is a, has a plumbing contracting company, right? I literally just went to a friend's house that owns a cleaning business, they're not clients, And the cleaning business, they have a dwelling. They have a lot of land, right? But they have their dwelling. They built a separate garage where they have two trucks for their crews and keep all their cleaning supplies.

Chris Picciurro, CPA:

So that's not a home office. That's a whole separate dwelling that they could deduct that real estate. And but then they have to determine, you know, are there is it separately metered for utilities? So there's gonna be some indirect expenses there as far as real estate taxes, maybe maintenance, but there could also be some direct expenses specifically for that that that that unit or that structure. Now if they have that structure, but then they have an office in the home, then you could have a home office in that structure.

Chris Picciurro, CPA:

But most of the time when people build a separate unit, where they're putting, like, work vehicles, a lot of times they'll build an office upstairs or they'll kinda break that break that out. So the more common thing would be just you have a home office, that you're not but you could have a situation where you have a home office, and let's say you sell Let's say you're an author, right, and you sell books, and you have a closet in your home that you ship the books from. You know? You then you can deduct the square footage of that little closet. I mean, you could.

Chris Picciurro, CPA:

Why? Nothing else is happening in there. You just have books. So a lot of times it's facts and circumstances. The most important thing is, is this a is that your primary place of business, principal place of business in regular and exclusive use?

Chris Picciurro, CPA:

Because I you know, people say, well, I I work I have a spare bedroom, but my my parents stay there, but I have a okay. That's not that's not gonna work. But some people I've seen have converted like a living room and a third of it got converted to a home office, so you could deduct a third of the living room because that's remember, it doesn't have to be an entire room. So I want to wrap on this. So home office, Schedule C, you're going to take that simplified or actual expense.

Chris Picciurro, CPA:

You're going fill out what's called a Form eight thousand eight twenty nine if you are a Schedule C or single member LLC taxed as a sole proprietor. If you're a partner in a partnership and your partnership is not reimbursing you for home office and you're eligible to have a home office deduction, consider taking a UPE unreimbursed partner expense. That gets reported on page two of your Schedule E. Finally, if you're an S Corp or C Corp, things get a little more complicated. Do not be afraid of a home office.

Chris Picciurro, CPA:

Seriously consider having an accountable plan. Talk to your tax professional where the entity can reimburse you for the home office tax free, just like you get get reimbursed as an employee for mileage and stuff like that.

John Tripolsky:

Absolutely. So really, started this off saying it's most likely something simple, and then we went off, and we talked about some of the complexities that it can grow into. But most of the time, it's pretty straightforward what it is, and you're not putting a nail in your potential IRS audit coffin, really. I mean, it it's there. Right?

John Tripolsky:

You know, Chris, I look at it. You know, if I was on the other side of the fence, right, if I was the average taxpayer, I might look at it as, well, how am I gonna prove this? Or there's a lot of what ifs in their mind. Maybe that's why they don't take it or they seem it's too good to be true. But honestly, right, it it is very cut and dry, black and white in the IRS publication, in their rule book.

John Tripolsky:

They put it in there. They're offering it to you. Take it. You know, take the damn thing. It's literally right there.

Chris Picciurro, CPA:

Yeah. If you're

John Tripolsky:

If they didn't want you to do it, they wouldn't put it in there. Right?

Chris Picciurro, CPA:

Right. If you're eligible for it, take advantage of the home office reduction. And guess what? We are working in our private CPA practice. Real story.

Chris Picciurro, CPA:

I'm bringing on a new client that was eligible for the home office and didn't take it, and we're amending the return to take it because it's a significant deduction that they're eligible for. Now if it's gonna make a $30 difference, did you wanna amend your tax return to take it? Probably not. But, again, those those are things that you wanna look at. So pull out your tax return.

Chris Picciurro, CPA:

If you think you're eligible for the home office, check it out. Just jump into our private Facebook group, defeating taxes, or comment here in on this YouTube video, and we will, we'll reply. And I appreciate everyone's time.

John Tripolsky:

Absolutely. Absolutely. So if anybody needs advice on a home office deduction, you can go read the, what, 7,000 pages or whatever it is in the IRS publication. It's theirs we mentioned. Check it out.

John Tripolsky:

We're just not pulling this out of thin air. It's something that's valuable. And frankly, it's pretty easy. So let's close on that note. We started with saying it was easy.

John Tripolsky:

Let's end on it for the most part. You guys have a great week. We'll see you back here again on the Teaching Taxable Podcast. Have a great week, everybody.

Disclosure:

The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.

Disclosure:

Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment advisor. Chris Picciurro is a registered representative of Cabin Securities and an investment advisor representative with Cabin Advisors LLC, teaching Tax Flow as an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.