Ronika Khanna walks through recording home office expenses in QuickBooks Online. Create a master account with subaccounts for rent, utilities, and insurance, then calculate your business-use percentage (example: 250 sq ft of 1,200 sq ft = 20.8%). Enter journal entries at year-end with the right tax codes, and post the balancing entry to owner's equity or shareholder loan.
Hello. Today we are going to talk about home office expenses and how to enter them in QuickBooks Online. There are specific rules around home office expenses, the types of expenses that you can deduct and the percentage. I have written a blog post which I included in the description section of this video and I highly encourage you to read that just so you're very clear on the rules. One other note is that there is a difference between sole proprietorships and how they reflect home office expenses on their tax returns and corporations who simply enter the amount of the home office expenses as a line item on on the GIPHY section of the T2. So the first step in entering home office expenses is to set up your chart of accounts. And the way that I like to do this, and this is optional, is to set up a master account called home office expenses and then have six sub accounts underneath them to correspond to the types of expenses that you are deducting. To do that we will go to our chart of accounts.
And you'll see here these are all the accounts that we have. And this is my spreadsheet of home office expenses. In this case you'll see that I have rent, hydroelectricity, home insurance, cell phone and Internet.
For now, I am going to set up rent, hydro and insurance as part of the home office expense section on the chart of accounts. Cell phone and Internet. They are subject to different percentages. Often because you use more of your cell phone and Internet for business purposes, you should determine that percentage, but it can be different from your actual home office expense. So in this case we're using 250 square feet of a 1,200 square foot apartment which gives us 20.8.
Of business use of the home office. But our Internet and cell phone are at 50%.
So let's go ahead and set up the chart of accounts. First of all, I am going to click new.
Expenses and the closest detail type is rent or release of buildings. I am going to call home office expenses and this is the master account.
Based on my spreadsheet. I have rent, hydro and insurance. So I want to make those sub accounts of the home office expenses. So I already have insurance. So I'm simply going to edit this and make it a sub account of home office expenses saving close.
I also have rent expense and I'm also going to make that a sub account of home office expenses save and close. And finally.
I do not have a utilities account for electricity, hydro, heating, etc. So I'm going to create a new account.
Under expenses. Again you need to make sure that your detail type is the same and I will call it utilities. And this will be a sub account of home office expense expenses. So now all three accounts will show up separately. So I can see the individual balances in each account, but I can also see the total home office expenses that correspond to this. If you own your home, you are allowed to deduct the interest portion of the mortgage only. And you might also have property taxes in addition to your insurance and your hydro costs.
Now that we have set up our chart of accounts, let us go in and enter the journal entry.
The date of the journal entry should correspond to your year end. If you're a sole proprietorship, that is almost always going to be December 31st. If you are a corporation, this should be the year end of your corporation.
And so now taking the amount from our spreadsheet, we have $5,000 of claimable rent. So I'm going to enter that.
$5,000 and then if I go back I have $375 of utilities.
I will enter that.
And then I have home insurance of $75.
Now the amounts that are entered on this spreadsheet are before sales tax. So if I am registered for GST and qst, and if you're registered for gst, HST and or qst, then you could also actually claim sales taxes on some of these items. And in this case rent expense does not have any sales tax on it. So this would simply be exempt and we are going to choose exempt purchases. Hydro costs and electricity and heating costs do generally have sales tax on it. So you can actually.
Reflect the sales tax on that. So here, because the business is located in Ontario, I am going to select HST Ontario and insurance. Despite the fact that there is actually a little tax box on it, this tax is not a claimable tax. So this will be exempt as well.
These are my total home office expenses. Additionally, I also have cell phone and Internet expenses of $360 each. And so I will enter these separately and they will not be part of the master category of home office expense expenses, but will show up separately. So put $360. Telephone is subject to sales taxes. So same thing, I am going to select HST Ontario purchases and Internet as well, which is also $360. I'm going to select HST Ontario. So this means that this will add to your hstitcs, which means these are claimable.
Sales taxes on your return and will actually reduce the amount that you have payable or if you have nothing payable, it will Increase your refund. So now the final line. We have a total of 6,312 and 35 cents. This will depend on whether you are a corporation or a sole proprietorship. If you are a sole proprietorship, you would simply enter owner's equity. You would add this as a new equity account and you would enter the total of 631235 to balance the journal entry. Because you always have to balance the journal entry. If you are a corporation, which the Sherlock Holmes Detective Agency is a corporation, then we are going to put this to the shareholder loan account. And what this means is the corporation actually owes this money to.
The shareholder. So you can actually reimburse yourself for the $6,312.35 without any tax consequences because these are essentially business expenses that you have incurred personally. So we are going to save and close this.
And now let's go to our reports.
We'll go to profit and loss.
And we are going to go to home office expenses. And you can see the total of home office expenses plus the Internet and telephone expenses.
You will notice that you have the total, but you can also see the individual amounts. This is useful. One final note on sole proprietorships, when you are entering your home office expenses, there is a special setting section on the tax return. The schedule is the T2125 which goes onto your personal tax return. And on that schedule you have to enter 100% of your expenses. So in this case, for example for rent you would enter the 24,000 and then you have to reflect the personal portion which would be be approximately 80%, 79.17% and that and then it will automatically calculate on the tax software and will give you the same result.
Regardless, though it is useful to enter it in your profit and loss so that it agrees to what you have entered into your tax tax return on Schedule T2125.
So that concludes the Home Office journal entry session today. If you have any questions, don't hesitate to leave a comment. Please subscribe and if you have ideas for videos, don't hesitate to let me know. Have a great day.
