TAX LAWYER EXPLAINS: Get Your Home Office For Free?

It is not that risky. Just do it right. Don't start telling me, oh, Mark, you're too aggressive. Because I've never in 25 years had a client audited for the home office.

It's not just the 9 to 5 you're in the office. It's the stuff you're doing at home, too. And now you get it. Under this administrative exception, home office also

unlocks the auto deduction.

Welcome, everyone, to the Main street business podcast. This is Matt Sorenson, joined by the great and powerful, my best friend, Mark J. Cole.

Oh, thank you for that. I appreciate it. Best friends.

We're doing the best friends.

Best friends.

Yeah. Yeah.

You know, you're always nervous when you throw out the you're my best friend. They're like, are they going to return that? I'm just going to lob that out there and hope it comes back, you know? Or the I love you.

I love you, man. I love you, man.

Yeah, I wasn't ready for that. You're going to throw that down. And this is our second date. Okay. Anyway, well, I just want to. Spoiler alert, tell you we're not going to get into the weeds on how to take the home office deduction. We're going to talk about what the home office deduction represents. It's not the dollar amount it represents at the heart of small business, what a small business owner feels entitled to. They're working out of their home. They started their business in the home. They're working nights in their home. They're working weekends in their home, and they deserve the freaking home office deduction. And when they hear an accountant across the table say, well, it's too risky. You can't do that. Or, there's some rules. You can't do that. Oh, my gosh, it's like popping a balloon with a pen. The business owner's like, I thought you were my advocate. I deserved a home office deduction. That's the core of what being a small business owners are all about. It's family, it's home, it's business. And damn it, I deserve that write off, and I want it. And when you help a taxpayer take that write off, man, it's liberating and it's. They could care less if it's a hundred dollars.

Yeah.

They just want to know they did it.

Yeah. And all of you business owners, I hope you feel that, because you know that, right? You know that there's this business that's being conducted in your home. You're using this space in your home. And if you were out in corporate America, your big corporation, right, that office that the CEO sitting in, that's getting expense, that's getting written off. But here's one of the things that's interesting about home office deduction. It doesn't actually show up in your business bank account as an expense. It's one of those areas you've got to think of and go find. A lot of accountants are missing it because they're not asking the question. They're just looking at the crappy accountants, I should say. They're just looking at, oh, let me see your bank statements and let me see your P and L. I don't see a rental payment on this or an expense because it's in your home. But just because you didn't write a check out of your business account to go pay a rent or lease doesn't mean you don't get the home office deduction. So when we will talk about how you take it here, we're going to get into some of the options and the methods, of course. And so we want to make sure you understand how to use this. Any of you business owners. And I know, Mark, for the Main street tax pros, this is definitely something. Any Main street tax pro is on their list to make sure that the client's taking it and to know also the different ways you can get it. Because there are a couple, like, nuances to this. The administrative exception. There are a couple layers that need to be peeled back.

Yes. And before we get into those details, I want to tell any accountants, listening tax lawyers, which we are. And I've read every case on the home office. I teach continuing education on the home office. And I want to tell everybody it is not that risky. Just do it right. It's not that risky. And yes, there's a different strategy when you're doing an S Corp home office reimbursement versus a schedule C versus a schedule E versus a Schedule F. Been there, done that. Don't start telling me, oh, Mark, you're too aggressive. Because I've never in 25 years had a client audited for the home office because I'm not taking it over the top. What I'm doing is I'm building a relationship with my client. I want to be on the same side of the table with my client. I want to tell them I feel their pain. It's hard to make ends meet right now. It's hard to pay the bills and you're working your arse off to try to bring your small business to fruition and then your accountant says you can't take the home office right off. Come on, be brave. I won't say anymore about that. And something lewd and crude. So I think this is a chance for so many of you tax professionals to build a relationship with your client. Talk about the home office deduction, relate with them on the power of just the concept that man, I'm going to take it to the gov. I deserve this write up. Yeah.

And I think that's where a smart sophisticated person who knows real Main street tax strategies really moves the needle on someone's tax return. Because they know what they can advocate for for their clients. They can be like, I'm with you on this, damn it, we're taking this. And any place that a good tax professional can give a business owner kind of like some not only support and advocate for them, but give them the strategy to begin with sometimes is fricking huge. I think unfortunately some accountants view their job as like being the IRS's police officer. They think they got a fricking badge from the irs, but not you can't take that doesn't sound good.

I don't know.

Could be risky. Shouldn't do that. Are you kidding me? But if you are up to speed on what is legit taxpayers of going and winning cases. Mark, you know this case on the taxpayer took the IRS to court on home office deduction because they denied it in a commonly used scenario. And now there's case law about this. But it took a freaking taxpayer to go pave the way and to fight against this. So I think for any of you business owners, I think finding a good tax advisor is critical for the tax advisors listening or tax accountants get smart on this stuff.

Yeah.

And, and it's, it's a much more enjoyable way to be a tax accountant or a lawyer, whatever you are out there.

Yeah, totally. And if you're a business owner, you have to stand up for yourself. And I'll say it right now, if your advisor is saying the home office is too risky or they don't qualify, you've got to get a second opinion. Your accountant must obviously be over age 70 or so scared of their own shadow. And I am not kidding. If any of you tax professionals want to go toe to toe with me on this, let's do it. I'm looking at my white paper for my Main street tax on this very topic. We got the Salomon case, the Mills case, the Popov case, 1997 tax relief act that codified the administrative exception US code 280A. I'm in this. You want to go toe to toe? Let's do it. Now with that said, I want to tell you something special. When I was a kid, I grew up watching my dad run his small business. He ran medical water testing labs for doctors and at night. And his dad was an entrepreneur and his dad before him was an entrepreneur. So yeah, I grew up drinking the Kool Aid, if you will. But I saw this firsthand. I'd come home and I might be in the 80s, working, doing homework, practicing the piano because my mom would kill me if I didn't get my time in or playing Atari360, you know, just with a little joystick. You guys know what I'm talking about. And I would look across the room and my dad in the basement would be at his desk, big desk, doing the books, doing some work. And he had a James Bond movie on over in the corner. That was almost every night. That's where my dad retired, was down to the basement. I'm going to work on the business. And. And that was his home office. I saw that every night. And for him not be allowed to take that write off for using that space in the home, it's almost offensive. And that's how small business owners feel like I deserve this fricking write off. Don't you get started on the auto deduction or electronics or equipment or supplies. We can go there too. But I just think the home office represents such a core value in the fabric of a small business owner's life.

Yeah. And that's what's different and unique from a small business. Family owned. I mean, and let's be honest, every big business started as a small business. There was someone that started that big business one day. And you can look at it from Steve Jobs garage.

Yeah. Such a great show.

You know, was the actual garage that was their home office.

Yeah. It's so good. All right, so I guess in summary, if you're a tax professional, please check out my Tax Pro network. We're meeting weekly with professionals around the country. I've got a certified 12 module program. Just get over to markjkohler.com, do a free demo, check it out, it'll blow your mind. There's no one else in the country helping tax advisors at every level, large or small, get into street smart tax strategies and how to relate to their clients and be a real advisor. So check that out. I have regular tax advisor boot camps to introduce the topic. You would love it. And for you business owners out There. Remember, you are the captain of your own ship. You've got to take control of your tax strategies. Doesn't mean you have to do them. Doesn't mean you have to be an expert. You just have to know that they're there. And when you bring them up, like putting my kids on payroll, funding a health savings account, self directing my Roth IRA, funding a solo 401k, taking the home office, you should be able to bring those up and your tax advisor should be able to just rattle off the best way to take advant of those. If they look like deer in headlights, you've got the wrong accountant. So you too can go over to the taxpro network@markjcohler.com and I've got page after page of certified tax advisors in our program that speak Mark Kohler, that speak Matt Sorenson. And they're getting trained every week. So there's solutions for both of you, whether you're an advisor or a small business owner. Let's get all on the same page. Let's get on the same island and work together to build our American dream. All right, how do I qualify, Matt? There's two rules.

Yeah. Well, you got to be self employed. First of all, you got to business. So for those of you are like, well, I got a job and I mean I work from home. I'm a W2 employee. That, that's not home office. I mean you might have a actual home office and we don't want to diminish that and that work you're doing at your home. But this, you have to have business ownership. And this could be a rental property. Yeah, could be your side hustle doesn't have to be a big basis, but could it also be. I have an office where I go do my work, but I also work from my home office for the business that I own. Yeah, I still get it.

That's one of the big seminal cases here. So without getting too far into it because we don't want any of you to fall asleep at the wheel and careen off the is the two part test to see if you even qualify. Is it your principal place of business. And also it's regular and exclusively used regularly and exclusively used for business. So if some of you watched the movie with Ben Affleck in the accountant, they were talking about writing off some of this little side hustle business. This woman in this little farmhouse had and he carved out this little space and he said there's our square footage of the home and you deserve to write off some expenses. Related to that. It was just such a classic little part of the show. And then he killed a couple people. Okay. But after that, we got to see how this played out in this family. And it was really based on those two rules. We've got this exclusive regular use space, and it's your principal place of business. That was the old school rule. Well, this doctor, this anesthesiologist, took the IRS on about 25 years ago, which was later codified in 1997, that if you still have this other place of business, you can still use your home to do the administrative work, do the books, return some emails, make some phone calls, write a letter, print something out. That's okay. It. It doesn't have to be your principal place of business any longer. And that exception unlocks it to me.

Yeah.

For every small business owner. Every small business owner should now take that. Yeah.

I mean, if you're a small business owner that just has the business at home, the side hustle, you're doing consulting, or you've got the rental property, you don't have a brick and mortar place. But we do run across a lot of doctors, dentists, lawyers, real estate agents, like, all these people that are like, well, we do have an office, and I'll meet customers there, meet my patients there, do my business there. But I'm also working from home. Like, I also do work from home. I'm the anesthesiologist in the example that's coming home and doing my charts and doing my billing and reviewing my things, you know, to work on this. I'm going to the office, I'm seeing patients all day long. But that's not just what the business is. I still got other stuff I'm doing when I get at home and on nights and weekends. And we all know that as small business owners, it's not just the 9 to 5 you're in the office. It's the stuff you're doing at home, too. And now you get it under this administrative exception.

I love it. It is so well said. Now, some of you accountants out there, or some of you may heard the word exclusive, okay? We get around the principal place of business because I'm coming home to do administrative work. But, Mark, you said exclusive. All right, let me just rattle off. I got like six to seven cases here. The Miller case, the Hughes case, the Senfield case, the Stalkup case, the Mills case, the Popov case. And what they talk about is the de minimis rule and the small home test. If your home is so small that this little Space that you have will get walked through and used personally once in a while. De minimis meaning not that much. It's a small piece. It's not like you're trying to write off your kitchen. You've got this little space that you're using for business and it's going to have some small time use as a person. All these cases where people like you, small business owners and you and me bought the IRS and said that's not fair and they won. And we've got some parameters. So if you're a tax advisor out there, you want to be able to walk your client through what space could be de minimis used in your small space. And you don't have to own the home. You could rent. You could have a studio apartment in New York City and still write this off. And the important part here is the home office also unlocks the auto deduction. Because once you have a little small home office, even 15 square feet, it's not again the write off I care about. It's the principle of the matter. And now when I jump in my truck or my car to run errands to Staples and Home Depot and Best Buy and Apple Store, ooh, that's not commuting anymore. That's a write off from my office to a business location. So the home office unlocks so many other write offs.

Yeah, awesome little tip there. Didn't even think about that. Okay, there are the different methods here, so we know what qualifies.

Yep.

Okay, this could be the administrative exception or this is the principal place of business. There's different ways to calculate this. And you can get into like an actual method where you're calculating this and how large of a space is this? And you're tracking all the stuff that goes into the cost of this, whether you're renting or owning. You can be writing those and it can be cumbersome.

That's kind of the regular method. And so about eight years ago, the

IRS said, yeah, let's just make an easy one. If you want to opt into this, you don't have to. We'll give you the simplified method. And essentially where the simplified method ends up at is you have 5 bucks a square foot to a maximum of 300 square feet. That gives you a 1500 dollar deduction. So and you can be like, I'm going to take that, I'll grab it, easy peasy. And for a lot of people I think that that works. Now you might be like, let's go back to Steve Jobs, you know, starting up computers. Like that's. That garage is more than 300 square feet. Yeah, I'd like to get a little more bang for my buck. And I have a lot more costs and stuff in there. We're building computers. There's a lot of electrical stuff going in there. I don't know, utility usage, whatever it may be. You go actual grab the higher deduction.

I love it. And start with the simplified and then graduate up to the actual method, the regular method. Again, a little more paperwork and cumbersome, but it can unlock a bigger write off. The takeaway here is that you're going to get something. And the simplified method is again that first base hit. And even if you have rental property, you still got to do the books for your rental property right off. So it goes on a schedule E. And here's another little technique or strategy. And you accountants out there know this. The IRS is chasing dollars when they audit a client. They're doing it to try to find back taxes and penalties. Do you really think they're going to audit a client for a $1200 home office deduction which their ROI on that is going to be about $250? No. Now that doesn't mean you take it if you don't earn it or deserve it. And we don't want to commit tax fraud. But you also need to know, hey, as long as I'm reasonable and I throw it in there and I'm not getting fat, I'm not being a hog, I. I don't want to get slaughtered here. I'm just going to do the normal amount slides right through, boom, bada bang, bada boom. I like that. That's good.

Yeah, I think that, I think it's bada bing, bada. Yeah, you know, but that's it. That's. Isn't that neat.

I think it's just so. But it's deeper than that. Again, it's. This is at the core of small business owners. It's not that hard. Don't be afraid of it. And don't listen to an accountant that says it's too risky. Yeah.

And I think this would be for you real estate investors too. We're talking to you too. I don't want you think you have to have. This is an actual operating business and we talk about our trifecta. It's on the left side. This is. Your real estate investors should be taking it too. If you got one rental property, you should still be taking this. And I presume you are working from home and even you're Thinking about building your portfolio and all this stuff. We want to take this home office deduction to even for you real estate investors.

Okay? Now, one other unlocking type benefit of this is not only the auto deduction, but it's also the kind of equipment, tool, supplies deduction. Because when you start to outfit your home office, that's not the building or the lease you're paying off. You've got now equipment in your home office. So now I'm writing off a printer, a fax. You know what a fax is? You heard about fax? Do they still use faxes?

I've heard.

I don't think so. Yeah, I've heard of those. Okay.

I saw one in an antique store.

You got a printer. And by the way, you may be building your little YouTube studio in the home. Matt and I both have studios in our home. So we've got our little YouTube studio. We got tripods and cameras and computers and laptops and iPads. A desk. I've got artwork. I've got a monitor, I've got tv. I've got timers, I've got lights. Oh, my gosh. Well, where are you going to put all that stuff in your home office? Yeah. How can you write that stuff off if you don't have a home office to put it in?

This is all deductible on top of the home office deduction. It's not included in it. This is on top of it. So excellent point there. And obviously, as you're ral stuff, I'm like, I don't think I expense some of that stuff I throw in the home office.

Oh my gosh, it's just so good. And then I'm going to just throw this out because it's a cousin to this strategy is the Augusta rule. Now, many of you may have heard of this rule where it's your business on top of the home office. You might have a customer event, you might have a vendor event, an employee event or a board meeting. So now when you have people into your home for a special event, you should be reimbursed in your business for that. Right? You just shared your home to your business. You didn't go rent the Hampton Inn for a day or the Hyatt. You rented your home, in a sense to your business. Well, the IRS has said this is a well established rule that you can for 14 days out of the year rent at a reasonable fair market value. You got to have some backup, pull some comps in your area. Just get on, you know, hotels.com or some make some calls, have a little something. But if you say, hey, the use of my home or backyard or whatever it is is approximately $1,000, I could go down to the Hampton Inn and rent it for $1,000 or I could use my own house for a thousand. The IRS has said that's tax free income. We don't care about it. Don't worry about it. Take a write off of $1,000 in your business and you don't have to claim it as income up to 14 days. It's called the Augusta Rule for the people that rent out their homes during the masters in Augusta, Georgia. That's where it all started. So it's not the home office write off, but it's the sister out of the brother. And so some accountants again freak out over this and would never take it. So you have to help your accountant, come to him and go, here's the list of the people that attended. Here's the business that was done. Here's the dates of the year that we did it. Here's the comps of what it would have cost to rent a space in town. Boom. Help me help you, help me help you. Come on.

Movie Jerry Maguire.

Yeah, I know it was an easy one. That was a soft.

It's one of the top tens. And I think this goes does go hand in hand, of course of using your home and doing it in a tax advantaged way. And so the tax code here is available to everyone to use in the same way. We all get to choose how we want to use it. Are we going to use it to our advantage and learn the rules and strategies doing the same thing in our business. You're already working from home. You're already having employees and customers over at your off at your home home for an event or an activity where you're taking use of your home rather than renting something out at a conference room or a boardroom or some other conference center. Let's take the tax benefit of it.

And I like what Matt's alluding to here is again that you are the captain of your ship and you should be talking to your account about this and demanding a conversation about it. And when your accountant is demeaning, belittling, too conservative, afraid of their own shadow, rude walk out. We've got a tax pro network that can help you. Now I have one more I want to kind of talk about this kind of unique strategy here is.

And the hits just keep coming.

My great today is. That's funny too. Matt went to a Lionel Richie concert And I was like, you went to Lionel Richie? How'd you get talked into that?

Don't knock it till you try it, man. That guy is a pro. He's a pro. I knew like, I knew 80% of his songs that I didn't even. I've never intentionally listened to Lionel Richie. And I'm like, I know like every song this guy sings. He was for two hours.

I love it. So you know Home Office, I got my greatest hits too. So here's another one that's important. We had a client client the other day that said, hey, I only use my garage for my Uber vehicle. That's it. I have an Uber and I have this garage. I park it in there. That's where I use it for my side hustle of Uber driving. I go, you don't use it for anything else? Just the car. Yeah. So I want to write off the garage. Now that would be a regular method strategy. You're going to look at the square footage, you're going to write that space off against your business. And there's so many good arguments here. I know an Uber driver that washes his car three times a day. He has to keep it looking sharp, make it sure it's protected from the elements. Having a garage, garage could be a great fit. Had another client that was storing inventory so that not. It wasn't just home office. They said, oh, I got a shed and I've got this there and that. Landscapers, contractors, handymen, real estate investors, fixer and flippers. Where are you putting all that equipment? Do you have a space in the backyard? Space in the garage that's dedicated to tools, supplies, inventory. Think outside the box. What does your business need? For years, Matt knows this. My family is all hands on deck. Deck. My home, it's an office building. Crap everywhere and filing cabinets, video studio, lalala. Because that's who you are. We know that's who you are. That's what you're doing. And if you're a caterer and you're working in your kitchen and preparing food in your home for a catering deal. I just had another client I met that during COVID started baking bread to make ends meet out of his garage. Two years later, full blown business. Quit his job, started a bakery and everybody loved his sourdough. I mean, it was just so. It's just crazy. So your home office is the nucleus for so much much that you're going to do and you've got to demand a conversation about it.

Are you sure your bread guy wasn't A grandma. That wasn't Grandma Sycamore, by the way. That's the best source. Shout out to Grandma Sycamore. Well, anyway, you know, here's the thing on top of it, by the way, that kitchen for the, the baker, that garage for the Uber driver is on top of a little section of square footage they might have in the office. That's. So it's that square footage where they actually have an office with a desk and a computer where they're doing the administrative of the billing, the financials, the thought, the strategy, the phone calls, whatever it may be. Plus it's that little section of the kitchen for the baker. Plus it's that garage for the Uber driver.

Yeah, and we should do. Okay, let's go where it can go too far. One of the seminal cases in this was a tattoo artist in San Francisco that tried to write off 75% of her apartment because she did her tattoo work in her home. So she goes, I always got people here and they're using my bathroom in my kitchen and da, da, da, da, da. And so I'm writing off 75% of my home. Okay, now we swung the pendulum too far. She lost her case. She got about a 35% use square footage write off. I was like, that was very generous. But anyway, we've got to be careful swinging the pendulum too far the other way. And I have clients that come in that say, well, shouldn't I rent my home to my business? Just stock and barrel, just rent my whole house to my business, or shouldn't my business own my home? No, we're not going to go there. These are some tax dodger strategies where your home is the business and wait, where's your home? Well, the business owns are. And they're just. Now we're going too far aggressive the other way when we're going to get audited and jacked up. People, you have a home, you have an apartment, you have personal use. No, I can't write that all off. I'm sorry. But can we find a percentage of that, a small space for that, and unlock all these other write offs? Damn straight. Just pigs get fat, hogs get slaughtered. Let's find a balance. And you accountants out there, you can do this.

Yeah, and let me make sure you understand that metaphor there. You want to be a fat pig. I think that's what the takeaway message is on that metaphor.

Charlotte's Web. Charlotte's Web. You know, Little was a. Was his name in Charlotte Oliver? No, it was.

I don't know.

Oh, she did his name in the cobweb. Oh, my gosh. We got to.

I do know Charlotte's Web. Charlotte's Web.

But he never got taken off to the butcher. He just was a nice.

He's just a nice little fat pig living life. Living large. But don't be a hog, because then you get taken.

Give me first letter. Wh. Wilbur. Wilbur. Wilbur. Wilbur. I love sh. Web.

Just call yourself Wilbur. I'll Wilbur.

That's what we're going for. Wilbur lived on, you know. All right, well, thanks, everybody. This is just you. Huge. We just are so grateful for you. And we love small business.

Yeah. Thanks, everyone, for tuning in. We'll be back, of course, next week. Always giving you excellent strategies on how to save taxes, protect your assets, build wealth. We'll see you next time.