What makes me self-employed?

    Published: 06-16-2009
    Views: 17,404
    Goodman & Company Tax Director Art Auerbach defines the term “self-employed” and explains how it is used on a tax return.

    Host: How do I deduct my home office?

    Aurthur Auerbach: Your home office expenses are segregated out. So the body of Schedule C are all of the expenses that are directly related to that Schedule C, they are not split. Home office expenses are expenses which are partially for personal, your home and partially for business which is ordinary and necessary for your business. So they go on a separate Schedule. For that, you will need Form 8829. Form 8829 at the top is going to ask you in the top four lines some basic questions. How much square footage in the house is your office? What's the total square footage in your home? That percentage of office to total is going to be a percentage that you are going to use to multiply against all of these split expenses to determine how much is going to be attributable to the home office business. Now does that mean you run around the house with old six inch ruler measuring the amount of square footage? Not necessarily.

    The easier test is probably number of rooms. The room that you pick to be your home office has one very specific test in it. It has to be regularly and exclusively used as an office. If it happens to be your den where the kids watch TV, do their homework on the same computer that does not meet the regular and exclusive use test. So that basically it has to be a place specifically set aside to do or use for business purposes. Now what do you do if you live in a studio apartment? I won't have a place that I can regularly and exclusively use right? It's a Studio. I can estimate the amount of square footage and perhaps, the time that I am using it as an office and the combination of the two will give me a percentage that I might be able to use for home office.

    Now the home office expenses come in three categories. Category one are mortgage interest and real estate taxes, casualty losses or if you're not an owner how much you pay in rent. You use the percentage that will determine square footage of office, total square footage multiplied by mortgage interest, taxes, rent whatever and that would be the percentage that goes to Schedule C. Now the reason that category of expenses is out there separately is if the mortgage interest and real estate taxes are not deducted on Schedule C then they are deducted on Schedule A of Form 1040 that's your home mortgage interest or your home real estate taxes, the portion that is not deducted on Schedule C. Category 2 of home office expense is all the maintenance expenses. So this is where utilities, a cleaning service whatever other maintenance expenses would come in there same percentage you determine on the top four lines multiplied by the expenses that becomes a deduction on Form 8829, the rest of it is personal, no deduction for that at all. The last category is depreciation on your home office. Now how do you calculate this? Well, you look it what you paid and let's use a home, a single family residence as an example. I purchase my house let's say for $500,000. $100,000 is of that is land, so I actually have $400,000 building, five less one. Of that $400,000 building I might have eight rooms and one room is my home office so 1/8th of $400,000 is my home office. So we started with $500,000, we took out the land cost, we then determined how much of the building was my home office so 1/8th of $400,000 that's $50,000 so that's what my home office represents. It's commercial, it's an office so I get to right that off over 39 years straight line and that's my depreciation deduction. You have now completed the three parts of Form 8829, you add all of that up, you carry it over Schedule C, line 30 and you do your math from there on and that's how the home office expenses get deducted.