Learn Why Home Office Deductions Don't Always Work | Home Based Business Exposed!

Learn Why Home Office Deductions Don't Always Work | Home Based Business Exposed!



hey what's up family it's your favorite uncle cousin Tyrone Gregory and today I am going to be talking about something that has really been grinding my gears something that has me in my feelings and that is the misleading information surrounding the idea that by having a home-based business you'll be able to get refunds every single month be able to write off these extra things on your taxes or even be able to save hundreds of thousands of dollars on your taxes see this came to my attention via this email and we can see here that one of our family members Chris sent me an email because they had saw a video on YouTube telling them that they can get a refund each month now and you can see here this dismiss being up front of transparent you can see my reply and and I stated that in my opinion there is no way to get an actual tax refund every month I suggested that maybe they were talking about adjusting the w-4 thereby having more taking home on the pay check and maybe that extra income each month they referred to as a tax refund but even still it was very misleading so I told Chris look send me the video let me see it for myself maybe I can help translate and figure out what exactly is it they're trying to say and Chris did so sent me a video and I watched it and I immediately became upset because that video was extremely misleading so I thought to myself well I wonder how many other videos are talking about the same thing so I did my research saw a few other videos and started they was giving the same misleading information and then I saw it on my own shadow I started to see it in a comment section you can see it here where people we're telling other people hey you need a home-based business you know it didn't stop I saw it again if somebody else hey you need a home-based business and that's when I realized something the people who are telling other people who are pumping up this home-based business they are the network marketing individuals they are the network marketers who are using the the the splendor the opulence the majesty of having a home-based business with the intent to lure you in to sign up under them and you know what I get it I completely understand but it's my job as your favorite uncle cousin to make sure that I equip you with the truth to make sure that you have enough knowledge and understanding so that you can make a very informed decision about the steps you're going to make this going to impact your financial life so in today's video I am going to be exposing home-based businesses so you'll learn how to tell the truth between what you see it here and what's real now don't get me wrong having a home-based business is a real thing if you have a real business and I'll explain that to you in a minute but having a home-based business just for the purposes of trying to write things off on your taxes or even save money that's not going to fly that's like having a kid just for the purposes of getting a tax refund it's not the same thing therefore in this video I put together a few scenarios so you'll be able to see in with with the numbers exactly how having a home-based business works what you're able to write off what you're able to see but before we get into that let's go ahead and kind of go through some of the theories and laws surrounding home-based businesses beginning with the definition okay so according to IRS publication 587 they define a home as a house and apartment condo Town Hall mobile home boat etc that provides basic living accommodations okay basic meaning you need to be able to eat poop and sleep alright so if you understand that anything that that provides you the opportunity to do these three things is considered a home for purposes of the home office deduction so now the next thing to do is determine if you qualify this is the starting point here is the the very first thing we need to do before looking at anything else is to determine if you even qualify for the home based business see the thing is when you join these network marketing companies and similar entities you don't become a business you become an independent contractor for that business and there is a very distinct difference yes independent contractors are afforded the right to write off certain things they are going to file a Schedule C because they fill out a 1099 miscellaneous or not that they fill out but they receive a 1099 miscellaneous and therefore on paper it appears as if there's a business but as we go through this you'll understand that there's a very distinct difference between an independent contractor and somebody who actually has a business that works from home all right so knowing that there's a few things that we're going to need to go through to make sure that you qualify well there's a few tests that you have to pass to make sure that you qualify for a home-based business and the first one will not defer so let me kind of go through it the first one is the exclusive use test the next one is the regular use test the next one is it must be your principal place of business and finally it must be for your trade or business all right so let's go ahead and break them down starting with the exclusive use now to qualify other the exclusive you test you must use a specific area of your home only for your trade or business right the area use can be a room or other separately identifiable space the space does not need to be marked off by permanent petitions you don't have to build anything but the key here is that it can only be used for business purposes the minute that you mix any kind of personal activity in there the exclusive use has then been failed and you will not qualify for the deduction seeing in this room right here it looks like it's exclusively used for business there is no hint of personal use there well maybe that you know furry rug on the floor you know you get comfortable there but outside of that this room specifically looks like it is 100% business use no issues there but on the other hand if somebody is claiming that this is their home office it wouldn't fly right this it's the living room it's the personal room this is where people gather this is where all kind of personal activities happen and just working from your laptop sitting on the couch does not qualify as exclusive used again because of the level of personal use that that offers and Plus that cows just looks way too comfortable how could you get work done like I would be sleep right now trying to work from that couch so understand that however there are absence to the exclusive use rule and the first one is inventory okay meaning that as long as you store things in there you know if you have inventory that you use to sell and you store it there whatever section of the home you use for that works and then take care so of course as a daycare you really can't have exclusive use because your business relies on individuals be all over the place okay so those are the two exceptions having inventory that you use for your business and then having a daycare so moving on to the next test regular use to qualify under the regular use test you must use a specific area of your home or business on a regular basis again I repeat that you must use that specific area of your home for business on a regular basis incidental or occasional business use is not a regular test what do I mean by that well that just simply says you can't work from home one day and then the rest of the time your view from work looks like this number one that's that's not regular usage now I can't say this there is no specific definition from the IRS that says this is what regular use is everything must be considered on a case-by-case basis and they're going to consider all of the facts in all of the circumstances so don't think that you have to put in 40 hours a week 20 hours a week or whatever because again there is no specific test but do keep in mind that every case is different and every fact will be considered right let's move on must be your principal place of business so what this test is saying that you can have multiple places that you work from however your home-based business has to be the main place of business okay that means that you know when it comes to trying to get a storefront well that's out the question all right has to be your main place of business has to be used for both exclusive and regular use for both administrative and management purposes like for example if a plumber now a plumber obviously does not necessarily work from home they go from place to place and that is their job they are out in the field however if their home office they used to create invoices to build clients to do the books of the Lea County to make all the phone calls to do the collection activity they are working in the capacity of administration and management and because they are doing that for their home that would count so make sure to keep that in mind as well the last test which is the most important test in my opinion states that it must be for your trade or business well this one is obvious right I mean if you're going to deduct the expenses of your home then it needs to be from your trade or business but here's the kicker again IRS publication 587 states that if you use your home for a profit-seeking activity that is not a trade or business you cannot take the deduction what is that a profit-seeking activity that is not a trade of business again I'm asking quote what a profit-seeking activity most any time when we are seeking a profit right it's for the intent of us having a business that's what we kiss at our profit seeking activity however the IRS doesn't view it that way you can't make profit and not have a business this is the Hobby versus business rule in the IRS eyes you can have a hobby and make money that's a profit seeking activity however they may not consider it a business the IRS has what they call nine profit factors that determine whether an individual is in business it was making a profit as a business or are they making a profit as a hobby so that's why the the trade or business or the under would go back what I was saying the difference between being an independent contractor for that company versus you actually having your own business this is what I'm referring to because if you are just joining these network marketing companies for the purposes of having a home-based business just on you can write something off that may not fly IRS can flag that as a hobby and therefore disallow all of your deductions as a business so you really want to be careful with that if you are doing it with the intent to actually be a business then that's perfect that's fine that's the way to do it but if you're doing it just because they lured you in with the the whole grandeur of yes you can do these amazing things or write all this stuff off you may run into a problem again keep these things in mind all right so let's go ahead and move on talking about the deduction limits let's assume that you meet all of the qualifications and you are ready to start deducting of course you're not going to deduct or you're not going to get the opportunity to write off everything all right you know when I was watching these videos man I would hear people say some of the craziest things like imagine having the government pay for 50% of your traveling cost I didn't having the government paying for up to 80% of your phone bill man let me tell you something the government ain't gonna pay for nothing think about that the government will simply say like you know what we will allow you not to pay tax on that or in some instances they'll be say we we may allow you to reduce the amount that you pay for that from other tax so you don't have to pay tax on it but think about it the government isn't paying for anything you are still going to pay for it you are still coming out of pocket paying for it in hopes that the government may not allow you to pay tax on it that's the only thing again it was just so misleading to hear that information so please do not start a home-based business with the intent of saying yeah I'm starting this home-based business and because I do now I get to go on to spend money on everything because the government is gonna reimburse me for it they're not they're simply going to say okay you don't have to pay tax on that money but in the end is still money you spent it is still money gone I may even venture to say is money wasted because if you spent it with the intent or the idea or the expectation that the government was going to pay you back No okay so knowing that now let's talk about the actual methods you can use to determine how much you'll be able to deduct and the first one is the actual method and then there is the simplified method all right so let's talk about the actual method the first thing to know when it comes to using the actual method is that there are three types okay there is the direct expenses meaning that these are expenses that happen directly in the part of the home that is used for business direct expenses are 100% deductible up to the deduction limits we'll talk about a little lady here and an example of a direct expenses say if you painted the home office itself not the whole house but just the business portion of the the home that the one that you use as an office that will be considered a direct expense the next one is an indirect expense these are the expenses that cover the whole house like insurance any general repairs and utilities these are deductible based on the business use percent of the home an example would be getting the whole house painted right that is indirect even though it covers the business portion of the home and the entire home itself so that one is limited other indirect expenses are your mortgage interest and your property taxes these are also limited to the business use percent of the home but they can be deducted regardless of the limits again something that I'm gonna explain later the next one is unrelated expenses and these expenses are well unrelated to the business use at home these are not deductible at all an example of an unrelated expense would be the lawn care or remodeling of the kitchen that has nothing to do with the business our office in the home so therefore it is an unrelated non-deductible expense all right now there are two rules of these limitations when using actual expenses one if you make a profit you can deduct all the business expenses related to your home up to the limitations of course second if you have a loss your deductions are limited even more that again you'll see all of this is what I'm talking about you see this when we get to the scenarios all right so the next one the simplified method let's kind of talk about that one as the name implies it's a extremely simplified way to figure out the deduction this method does not require all of the calculations for the limitations it does not require all the substantiation of the actual expenses all you do to determine your deduction is multiply the area used for the home by five dollars up to three hundred square feet so in the end the maximum deduction anyone can take using the simplified method is only 1,500 bucks because it three hundred square feet of the max times five dollars per square foot $1500 that is the max you can take however there is one rule with this one that you want must make make note of and that is you must make a profit okay using the simplified method you must make a profit and keep that in mind profit keyword profit put that in the back of your mind profit and you'll see why I keep mentioning the word profit in a minute but using the simplified method you must make a profit if you take a loss or even if you break even you cannot use the simplified method all right it is show me time seeing this is the thing that I want you to do this is the the mindset that I want you to have every time you hear somebody tell you something that sounds too good to be true tell them this say run need those numbers all right that's exactly what I want you to do now if you don't want to be as aggressive of I just did it you can politely say you know can you please show me the numbers yes but I'm upset so I'm telling you somebody come at you be like man you can do this you can do that you can do this I can do this tell them run me those numbers simple as that and that's exactly what I'm getting ready to do for you right here these scenarios are in each of these scenarios you're going to see where somebody makes a profit where someone breaks even and where someone takes a loss so you can see how having a home-based business affects each of those scenarios all right before we begin please note that these scenarios are only focusing on the aspect of a home-based business everybody's situation is different everybody's gonna have different outcome but I am only focusing on the home-based businesses and the duct shion's and the deductions that are allowed according to the IRS now this is short home-based business in itself is a very involved concept so much so that I had to give it its own separate video inside the self-employed tax academy so what you're getting here is just a summary is just a very generalized summary so you can see how it affects individuals here we have scenario number one this individual single no kids they own their home they have wages of $60,000 now I put wages here because 90% of the time with these network marketers are people who are talking about home-based businesses they're going after people who have w-2 jobs because they are the ones who are trying their best to reduce their taxes and try to figure out a way to get more money so a lot of times is those who have w-2 wages so in these scenarios these are people who are w-2 earners and they're working on being self-employed so this individual again owns their home wages of $60,000 and here are their expenses they have mortgage interests of $12,000 property tax of $3,000 their utilities which includes the internet comes up to about $6,000 their vehicle runs them about maybe $3,000 a year that averages about to maybe 250 dollars a month and they have a cellphone bill which runs them $1,800 year for the cellphone and their home is valued at $200,000 now for depreciation purposes that is the actual basis I so and that's – the land value all right so let's take a look at these and see exactly how that works all right so I'm gonna go through these scenarios real quick here just can I want to be able to get directly to the numbers now what we have here is the before we do the Home Office before we add the home office this is what this individual looks like again they're single as we can see here wages of $60,000 and become they own their home they get to itemize this is what itemization comes with to note this number here on line 42 15,000 826 that is what they get to autumn eyes before the home office deduction their tax liability at this point is where is it at here down on line 63 their total tax 5770 they made 60,000 they had $6,000 with Hale from their wages so they ended up with a refund of 230 dollars that is the the foundation now everything that we do here on out is going to reflect the home office looking at the ten thousand dollar scenario here I say they joined a network marketing or they joined that he started a home-based business and they made ten thousand dollars here on their schedule see right so let me face this again him so let's scroll through here again still same income sixty thousand after writing everything off on that Schedule C they had a profit of 800 and eight dollars so increased their income by eight hundred and eight dollars there's that one half of the self-employment tax and let's look at the bottom line look at the line forty here the itemized deductions went down why is that because there is no such thing as double dipping you and write it off as a business and then write it off again as a itemized deduction so whatever you write off over there gets prorated and the remaining part gets carried over to your personal expenses on a Schedule H so keep that in mind so at the end of the day having a home-based business with a profit so that they can deduct everything actually let's say they went from getting a refund of 230 to only 822 dollars so let's go ahead I'm scrolling through everything so we can look at the actual home-based business and here it is this is the form the 88 29 that is what's used to figure how much of your expenses you get to deduct now I'd use and this is going to be for all the scenarios 20% and that is being extremely generous giving you 20% in these scenarios as an amount of the area used for your home because on average is between 9 and 13 percent but I want it to be generous just for purposes of these examples I went to 20% just so we'll see so here we are 20% of everything here's our $12,000 mortgage interest here's our $3,000 property taxes $15,000 total but we only get 20% of that so that became $3,000 here on line 13 so when we subtracted the $3,000 from line 8 which is our gross income from the business now let me pause right here and explain something when we talk about the gross income from the business notice we made we brought in in this scenario $10,000 but here line 8 this says enter the amount from scheduled seed line 29 and if we go back up the schedule of C and look at line 29 that is the $10,000 – our normal expenses and for each one of these scenarios I left the expenses – saying just to say you know we have some money in advertising we get to write off some some mileage for our vehicles and then we have some supplies all right then there's 80% again being very generous the 1440 will see here is our cell phone bill up to 80% of that 1,800 and this is going to be the same for all the scenarios I'm being extremely generous because I believe that it's less than that but on a high end we'll see and I gave business mileage of 800 miles I mean think about it if you have a home-based business where are you driving – but I just said you know what for the sake of this let's go ahead and say they drove about 800 miles for the year all right so now we know that let's go back to our business use of home we here have the six thousand 32 which is the ten thousand – all the expenses that is the starting point for the business use of home so when we subtracted the 3000 from the 630 – we had a balance of 3032 left and then we go down here we have some repairs and maintenance to the house we put it there notice that there's column a for direct expenses column B for indirect expenses do you have to make the choice to be honest there then our utilities came with the 6000 so we had 6200 again 20% of that is 1240 so now what we did was add the twelve forty here plus our depreciation and let me scroll down here because we did have depreciation for this home value was 250,000 – the value of the land like I said $200,000 is what we're depreciating the business use 20% 40,000 for shir gives us a 984 dollar depreciation which is what we see here and when we add these numbers up this line 35 is what we are allowed to deduct as our home-based business so we subtracted that from the 632 which is how we ended up with the 808 and you'll see it right here on line 30 of the Schedule C but let's go back up to the very top adding a home-based business for this individual again single no kids w-2 wages of $60,000 they did good they ended up with a refund originally of two hundred and thirty dollars added a home-based business actually made some money and then in a wing yeah yeah that's what I do want to say run me those numbers yes you got to deduct everything but you know what in the end there was no tax savings you actually ended up owing money so let's move on let's say same scenario 60,000 this person broke even let's go to the Schedule C here going scrolling scrolling here they only made 30 968 that's I'm registered at 10,000 they made three thousand nine hundred and sixty eight dollars which pretty much broke them even as Sealion twenty-nine tentative property lost zero there was no loss there was no gang broke even but now we see the line 30 the amount that we get to do from our business use of home there's only three thousand where does that come from well that's gonna take a look so again same everything I didn't change the numbers the only thing I changed was the amount of profit that they took in see the difference we still got the twelve thousand for the mortgage interest at three thousand dollars the fifteen thousand total the twenty percent of that is three thousand but because we had no gross we had nothing to put here on line eight all these other expenses the repairs the utilities the depreciation none of that got calculated but remember I said in the very beginning part of this video that you'd be allowed to deduct the mortgage interest up to the limit regardless of all the other limitations this is what I was referring to you still get to be Doug twenty percent of these I like to call them category one expenses regardless of anything else so that's why they still let me scroll back up here they still get to deduct the three thousand dollars okay now what did that do for them as far as taxes go well here they no longer owe but instead of getting a refund of two hundred and thirty dollars they're getting a refund of two hundred and seventeen so they still took a loss it still didn't benefit them you know that's why I say yeah home-based businesses may not be the best for everybody in every situation all right so understand that now let's look at a situation where they took an actual loss here we see that there is they get to subtract five thousand nine hundred and sixty eight dollars which reduces their income let's scroll down they still got the same amount of itemized deductions no but looky here in this scenario they actually come out on top there's a refund of eight hundred and eighty two dollars like it was a full swing from a profit – loss so let's scroll down and see how did that play out so here it is they had two home based business they've made only a thousand dollars extra for that year took a loss of twenty nine sixty eight plus they still got to deduct the three thousand dollars for their home based business so those two added up to the to the loss of fifty nine sixty eight that we see here and again because nothing's changed we have nothing to enter here on line eight pretty much a negative numbers their results as a zero for them the only thing you'll be able to deduct is 20% of the mortgage interest in real estate taxes all those other things they're talking about the repairs the utilities the rent none of that gets deducted only the property the mortgage interest on the property tax so that's why I say it's misleading the only thing they got to deduct here is the $3,000 now my concern with this type of situation even though yes they benefited they won they came out on top they got a refund of 882 dollars but to do that they had to take a loss and my question to you is how many losses are you going to take and be ready for when the IRS says okay is this a hobby or is this a business because there is too many losses being reported you have to keep that in mind all right so let's go ahead on to scenario number two so here we are scenario number two same single no kids on home but now they have a higher wage because I've heard that this benefits higher earning individuals so here I raise the wages up to $100,000 and guess what if they have $100,000 maybe they have a bigger house so the mortgage interest went up to 18,000 property taxes went up to 5,000 utilities went up to 8,000 the vehicle went up to 4200 and because the cellphone plans normally stay the same no matter what income range you're in we left the cell phone at $1,800 their home value because again they may have a bigger home is valued at $300,000 so let's go ahead and take a look at what this looks like here all right so here we have scenario two again speeding through it because the information is the same they have somebody single no dependents hundred thousand dollars of income here is their total itemized deductions originally again this is before we add the home business we can see twenty four thousand seventy three groaning down out of a hundred thousand dollars they had fifteen thousand dollars with which results in a refund of 1292 dollars and again this is before we had the home-based business so let's go ahead and look at what it looks like here we have a hundred thousand dollars we added $10,000 to the business income let's see what that looks like Wow so it pretty much brought their refund down way down almost like a thousand dollars right there two hundred and forty-two bucks I mean you know what I mean I guess we can be happy that they're still getting a refund but what happened so ten thousand dollars profit on a home-based business it looks like they pretty much zeroed out because they wrote off three thousand nine hundred and sixty eight dollars was bought their tentative proper down to six thirty two and it looks like we were able to get a home office deduction of the same six thirty two so they broke even so let's go down here to the eighty eight twenty nine and look at what happened get keeping it generous at twenty percent here is their total mortgage interest property taxes twenty three thousand total twenty percent of that 4,600 which we get to subtract from the 632 which leaves us one thousand four hundred and thirty two of the other expenses alright that's exactly how they works there so of the eighty two hundred twenty percent of that is sixteen forty so of the sixteen forty we got to subtract of 1432 and that's what gave us the six thirty two or the six thousand thirty two dollars and that's why we were able to break even again resulting in a refund of one hundred and forty two dollars which was way less than the original so in this scenario having a home based business did not do them any good now let's go to a break-even scenario well looky there another loss so we were able to reduce our wages by four thousand six hundred bringing our total taxable income at 995 400 there so let's scroll down notice again our original itemized deductions went down no double-dipping so what is the end result here we have a refund now the refund was just a little bit less than the original refund but hey they still refunded but again it wasn't this is less than the original refund so even if they start a home-based business and they break even it's not beneficial let me scroll on down to the Schedule C and we can see here it is just so you'll see it there's how much they brought in the thirty nine sixty eight thirty nine sixty eight worth of expenses broke even but they still got to deduct an amount for their home office and that's because they still get to deduct regardless of anything else twenty percent whatever your percentage is of your mortgage interest and real estate taxes okay so that's why we get the loss of the forty six hundred but back to my original question how many losses are you wouldn't it take before the IRS says hey is this a hobby or business let's look at one last scenario when there is a loss involved what happened is here well the loss gets bigger so instead of a $4,000 loss to have a $7000 loss and what is the end result well of course the refund is a lot higher in this search and Erika in this scenario I can't even talk right now in this scenario two thousand dollars versus fourteen hundred or even twelve hundred of course that's a win but look how much of a loss you had to report to get that and save scenario when we go down to the eighty eighty eight twenty nine the same thing you have the loss to twenty nine sixty eight plus the forty six hundred you're allowed to deduct that's what gives us our amount here these two amounts combined together equals this loss and you're good to go so we can see the trend starting to form here if you make a profit on a home-based business then you lose if you break even on a home-based business then you still lose but if you take a loss on a home-based business then you are going to win but what is the risk of taking a losses what you have to measure okay let's go ahead and look at the next one scenario number three in this scenario of having somebody was married with no children they own a home combined wages of a hundred and forty thousand dollars okay their mortgage interest is twenty thousand dollars their property taxes went up to six thousand dollars their utilities at eight thousand dollars the vehicle combined with twenty two is about six thousand dollars a year and again the cellphone I'm going to keep at eighteen hundred dollars just because maybe only one person actually decided to do the home-based business and then their home value is at five hundred thousand dollars so let's look and see how a home-based business is going to affect somebody in this scenario all right so here we have the married couple as you can see we have a married filing joint filing status we have their wages of a hundred and forty thousand combined nothing else there here's their itemized deductions they are writing off twenty seven thousand three hundred and fifty three dollars tax liability comes up to seventeen sixty one for they had twenty thousand dollars with Hale combined between their wages so they're getting a refund of 2386 this is the starting point going through the same three scenario let's look at the one if they were one person started a home-based business had a profit of 10,000 dollars look at that nothing changed so just looking at that another break-even situation let's scroll all the way down to our Schedule C so you can see that the numbers are there there it is ten thousand dollars same expenses advertising car supplies and and 80% of their cell phone bill being written off very generous amounts here but it's the same scenario here they had a tentative profit a loss of the six thousand 32 and the home based business gave them either dice in the six thousand thirty two so it pretty much remained to say now let's go here and look at everything what happened still given a generous amount of twenty percent twenty percent of their mortgage engines and real estate taxes came up to five thousand two hundred leaving only eight hundred and thirty two dollars for the other expenses to get deducted so when you put the the two fifty two hundred plus the eighty three eight hundred and thirty two dollars that gives us our 632 they pretty much broke even now the good thing is anything that doesn't get deducted gets carried over so you can carry over an amount till next year and again it to st. see – even if you carry it over if there is nothing to run it against or nothing to deduct it from you end up in the same situation alright so in that situation a hundred thousand refund got reduced remember they originally they had a refund of over two thousand dollars now their refund went down to a thousand dollars eighty six to a thousand eighty six dollars less the capital for the break-even scenario break-even scenario there's a loss fifty two hundred it seems to be the same no matter how much the income results in let me go down to the schedule see there's the amounts breaking even they got to deduct fifty two hundred where's at fifty two hundred coming from let's look at the business use of home I notice it starting to sound redundant cuz I'm feeling redundant but I want to show you these numbers they got to deduct 20 percent of their mortgage interest and property taxes only all of the other expenses because there was nothing left there was nothing left to deduct so that's all they received simple all right let's look at when they take a loss save scenario loss on the front end gets bigger which obviously in this case they win refund is higher right instead of two thousand dollar refund they're getting eight three thousand one hundred and four dollar refund looking at the Schedule C they only made $1,000 from the business but I thought the expenses they ended up with a loss they still got to deduct the 5200 from their mortgage interest and property taxes which add that to the loss there gives us the 81-68 looking at the the 88 29 is the same as it was before it's only fifty two hundred so we can still see no matter how much that they're making the only way to really profit from a home based business is to make a loss or to take a loss which is extremely risky in this type of scenario okay so one more scenario let's go ahead and make sure we look at it scenario number four of the last scenario I'm going to give you an I promise we are done but this one here had to be important because a lot of people may fall into this scenario here somebody was single no kids now here's the difference this individual rents their home they are not home owners they pay rent okay Ritt their home still make a really decent salary wages of $60,000 here's their expenses the rent is about eighteen thousand for the year which averages about two maybe fifteen hundred per month so eighteen thousand a year in rent the utilities two thousand four hundred including the internet vehicle averages about maybe three thousand dollars a year or or two hundred fifty bucks a month again single-use cellphone eighteen hundred bucks and that's it for renter they don't have all of the property taxes and and and and things like that so those are all of these there is no home value nothing to depreciate so this is the scenario for renters all right and this goals if you married single or whatever the reason I didn't I guess I'll all pause right here and the reason I didn't put kids in any of these scenarios is because kids within themselves offers a different set of credits I wanted to focus solely on the benefit that's out there or the rumors that states having a home-based business is going to afford you all of these immaculate things which as we can see the only way that's true is if you're taking a loss so let's go ahead and look at the expensive for somebody who rents all right so here we are we have the renter again single no dependents income of $60,000 notice there is no itemized deductions nothing to write out cuz they're not homeowners everything is rent their tax liability eight thousand one hundred and forty five dollars they had eight thousand dollars withheld from their w-2 because they're single no dependents so they're withholding was a lot higher and they ended up only owing a hundred and forty five bucks this is our baseline this is what we're starting same scenarios let's say they started a home-based business and they profited $10,000 what is happening here profit the adding income to their way it's not taken from it they're adding income because in order remember the rules for a business use of home you have to make a profit in order to really see any kind of deduction so when you make a profit you're adding to your income I should have said that up front but it really just just reminded myself here so there is no benefit there so let's scroll down see what happens again their standard deduction stay the same because they're not itemized something you have to worry about it their tax liability came up to eight thousand eight hundred and fifty three so with a home based bill in an effort to try to reap the benefits of it their balance dude went up from like a 140 some bucks to eight hundred and fifty three dollars that's not a win in my opinion that is a loss let's look at the profit and losses look at the business there it is the ten thousand dollar profit right here are the expenses I kept the same and here's our total tentative profit in lost six thousand thirty two but we got to deduct the four thousand one hundred twenty two dollars from the business use of home so let's go ahead and look at it so employment tax so here we are twenty percent a very thing I'm still giving them twenty percent even though they rent I'm still giving them twenty percent deduction note we have our six thirty two which is our starting point there is no mortgage interest there is no property tax or anything like that so we still get the full six thirty two is an amount to compare our dark deductions tooth so we scroll down here's the rent that we paid we have some repair maintenance to the general Department if it was made directly to that room itself we would put it over here on column a but because it was just some general repairs we put it here maybe little plumbing or something like that and then here is our utilities comes up to twenty thousand six hundred twenty percent of that is 4120 that's what we get to deduct the 4122 for them out here because we have enough gross income to actually cover that so that's why we see it here as a deduction on the Schedule C but again looking at the end result we had to make a profit to be able to write that off and making a profit added to the income which then increased our Mount do so I really don't see how that's one way in there now let's look at the break-even scenario do you know what the break-even scenario is there's nothing there now the other ones we took a loss remember when you had a home and you broke even you still got to write off something why is it not showing up here there is no loss taking when you are renting well let's take a look and see we still have the standard deduction that's there and now our nothing's changed for us our balance do is still the same taxes are still the same federal income tax withholding is the same and the balance due is now went back to the original or what happened so here we are we started the home-based business made some profit the thirty nine sixty eight but guess what we broke even there was zero loss zero gain but what's interesting is we have zero expensive use of home nothing let's take a look at the eighty eight twenty nine to see what happened still got the same twenty percent right still got the same deduction 240 120 but guess what this is the problem well I think I want you to be honest tell people Eggman show me the numbers is it really gonna make sense the situation is remember these what I call below the line expenses because they're below line 15 if there is nothing on line eight then these expenses don't get to get deducted there is nothing to be ducked so if you are a renter and you're breaking even the red in line 18 falls below line 15 therefore anything below line 15 is subject to a limitation if there is nothing to subtract it against you don't get it so in this situation where if you were a homeowner yes you probably would be able to take a loss but as a renter you get nothing you get absolutely nothing if you break even or let's take a look at what happens if we take a loss well look there is a loss on there but that loss is coming from the Schedule C itself their loss is coming from the other expenses not having to do with the home-based business that's coming from advertising the mileage the supplies your your cell phone that is coming from not the home-based business when it comes to your home-based business you get nothing as a renter if you don't make a profit so in summary as you can see having a home-based business is not all of this spectacular resorts not as spectacular as they would make it seen so again we gonna make this make this a hashtag family we are going to say hashtag run me those numbers anytime somebody's trying to tell you something simply reply respectfully so many numbers make sure that it makes sense because we can see if four scenarios run in three different ways the only time having a home-based business was beneficial is when somebody took a loss and again that is real risky losses are legal losses happen but so many losses the IRS is going to sit up here and ask you is this a business or is this a hobby and remember as a worker of these network marketing companies you're not a business you are an independent contractor for that business and there is a very distinctive difference but look I know we went through a lot of scenarios and your mind is probably blown right now but hey I'm younger cousin I love you I did something and I'm really excited here I'm really gonna show you I created specifically just for you first I'm doing it I made you a tool because I want you to be able to run the numbers for yourself even if they don't want to run the numbers for you I want you to be able to run the numbers for yourself plug in the numbers plug in everything and see just how much you'll be able to deduct so you can kind of reference these scenarios black is it going to make sense or is it not because another thing that you have to so keep in mind is not only did it cost these individuals like some had higher refunds I'm sorry some had higher balance dues or lower refunds but having a home-based business also incurs additional cost the cost of your tax preparation is going to increase because now you're doing a small business return there is the cost of actually joining these marketing informations right there there there was this additional cost that you are going to take on so make sure that you are aware of all of those things I had them in and see is this right for me is doing this going to benefit me 100% but let me show you this too right the darker Eddie for you right here alright so here it is family the tool Locker rated for you to home office deduction estimator it's a very simple tool I did it here in Excel for those of you who know me you know I'm an old school fan I love pen and paper I love Microsoft Excel but just kind of see this is what you can do and this is absolutely free to you I'll make sure I put the link down at the bottom so you can get your copy of it all you have to do is enter here the estimated amount of business use and let me just for purposes of showing you how it works I put 20% because that is the examples that we were using in the video there so here you put the gross estimated income now this technically is not the the profit because remember it wasn't a profit that we was putting in there it was the amount left over after the expenses so it's the and I'm probably make sure I change that so when you get it you'll see something different and to say your net income you take your profit minus your expenses start there and I do believe in the scenario for that we were just using the actual bottom line came out to be what was it six thousand thirty two so we'll put that there 6030 to the people that let me just pick a number like I said I do believe they had twelve thousand dollars mortgage interests they had three thousand dollars property tags yeah I remember that fifteen thousand and you can see it everything for you it gives you the 20% deduction that's available off top when you when you have mortgage interest and property tax it tells you what's available for the other expenses and so then we enter here either direct or indirect and I think the repairs and maintenance in that scenario was $200 they had utilities I don't know five thousand let's just add that there so it came up to a thousand forty and when we compare the two you know we have total possible deduction for a thousand forty so at that point you'll have an idea of what it is you can deduct just play this you know just by plugging in some numbers let's say for example we want to see in a lost situation how much would we deduct and every loss situation that was a thousand dollars look at that it tells you right there the mag's you can be done three thousand dollars right so let's change this let's let's go back let's put the sixty 32 here but let's change the fact that now we're dealing with a renter so we'll remove all of the mortgage changes and property tax there with a strictly deal with will put rent I think the rim was eighteen thousand so BAM it tells you right there that's how much you can be done right as a renter that's how much you'll be able to write off with all of these expenses but let's say for example we had we broke even we had zero look at that it tells you you won't get your write-off nothing even if you took a loss I guess you'd in this one you wouldn't be able to go to zero you wouldn't be able to be dug nothing but that's just something I created for you I want you to have it just so you can play around with the numbers just so you can see if it is going to make sense for you to do and note here in the Box I did not add the casualty loss and depreciation are not included in this estimate why because casualty losses are used by less than one percent of the population and depreciation was not included duty to do to the amount of information that will be needed however if you want to guess the depreciation the average amount of depreciation soar is around $1000 so you can actually include that here in other in that box right there so you can still get kind of an and accurate again this is an estimator it's a free tool is yours to use all you have to do is just click on the link down at the bottom you'll you'll be taken to the site where you retain your information and it'll be delivered to you immediately this is in Excel it would be delivered in Excel however it is also available in Google Docs if you don't have Excel everybody say they have Google Docs we have a Google account you have Google Docs so it's available for you there's there I thank you for taking the time to watch this video man younger cousin loves you make sure that you subscribe to the channel if you are if you haven't already subscribe hit that subscribe button as you'll be getting more things like this delivered to you as always if you need me not to find me shoot me an email look me up on social media and other social media outlets here and I will see you in the next one

24 thoughts on “Learn Why Home Office Deductions Don't Always Work | Home Based Business Exposed!

  1. This was so fantastic!!!! I am so lost and own a salon. I will watch all these and I will contact you soon for some advice! thanku!!!!

  2. Awesome video! What if I use the sitting area of my master bedroom? What about using the garage? I am in lawn care and execute all administrative tasks at home.

  3. I am an independent contractor. My primary workplace is in front of my computer. However, like the plumber, my individual jobs are done everywhere. Let me explain. My primary contract involves me going to various locations and conducting "inspections", and taking pictures. (This is actually done for multiple companies, not just one {I am registered with over 100 companies}). I started out making only 500-1000 dollars a month. Now I normally make anywhere from 1500-2500 a month. This is not a "hobby" for me. It is my full-time job. I have to sit at my computer and find the individual jobs, make offers on them, and put together routes so that this is profitable. (Obviously, just one gig does not make me enough money). Then I come home to upload my pictures and type/put together my reports (some formats I only have to answer multiple choice questions). However, in the end, I still work for myself and am an independent contractor and do not have a "business" per definition. I am looking this year to adding other ventures to my repertoire, buying some tax liens and driving for door dash. Since this is my only job and not my side gig, can I call this a business? (for the purpose of the home office)? My computer, phone, (the phone because I take pictures with it and so schedulers can contact me) and the internet is an integral part of my being able to do my job.

  4. Ok!! So I'm an independent contractor for the company I work for. I work from home mostly, but I do go into the office to do admin work, such as deposit checks& check the email. This is my 1st full year of filing as self employed. I'm so confused on what I can and cannot do😭. Being that I still have a specific time to be at work and I still drive into their office weekly, I'm TOTALLY lost on HOW I benefit from THIS!! PLEASE HELP. Thanks!

  5. Покажy как дeлaть195 бakсов каждый дeнь. Инфоpмация на кaнaлe.

  6. This guy is good and had me cracking up. “Where you driving to?” I do have a question: Can a franchise be considered a home based business?

  7. I like your style of informing the public. I'm a straight sgooter as well and despise deceit. Who cares if they don't like you. Lol😂

  8. Yes my art table is exclusively for my artwork but that doesn't mean that the kids aren't going to make their way over there at some point though being a single parent working out of my apt. So is my art table now not exclusive? I could be nitpicking but it's a good question considering what you said. And yes there's a day care about 2 feet away(single parent) but I sure don't depend on them to make things/business work,lol and if your living area is the size of hotel room then yes all the area is being utilized. And yes having children in order to get refunds is a very real and simple thing but is it feasible does it actually make money N to the O. Raising a child 50.1%( minimum) of the time throughout a year is way more expensive than what you will get back but this is a common understandable way that we could really get the younger generation into understanding financial responsibility. Because it's a real thing that happens every day.

  9. Thank you! I’m so tired of ‘helpful” individuals telling me how I can make the government pay for all my living expenses because I work remotely for my company. “Have you read the tax code? Please stop talking to me, until you do….”

  10. Tyrone, you should make a video tutorial on Quickbooks online for Amazon/eBay/Etsy etc sellers. I would happily pay for it. Your teaching style is clear, detailed, and easy to understand. Subscribed, joined mailing list, and liked your Facebook page.

  11. Hi, I’m starting a business and would like to get in contact with you to help with the paperwork. Can I have your email?

  12. I work out of a room in my parents home. They also use a separate room as a home office for their business and receive tax deductions for that. Would me becoming a sole proprietorship using their address have an affect on their taxes?

  13. I appreciate you! I needed this video so desperately. I live in Pennsylvania and am concerned about the local and state taxes since I’m somewhat familiar with federal taxes. I hope that I can afford you. 😀

  14. Hello could you please get in touch with me. I would love for you to be my tax person. Thank you very much.

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