Tax questions--write offs as an independent contractor

I'm starting my taxes for 2017. For my side gig, I am an independent contractor, meaning I technically "own" my business. I'm trying to figure out how to calculate my home office space for my house.

My house is about 1380 square feet according to the tax assessor, There is a small bedroom (10x12) that has a desk, and that is it. That room is used basically 100% for my admin of my independent contracting, although just a 4x5 area of it is (the space where I sit down to file reports at the desk). Then I keep my equipment (it smells) in the basement. This is in another room that is about 12x15, and is basically all that is in that room, other than Christmas decorations. The equipment takes up about a 5x5 area. 

What is the space that is used for my business? It depends on how you look at it, but it is either 20sqft, 120sqft, 45sqft, or 300sqft. Which is it? The area that I'm actually using, or the entire room? Can I include the space in the basement? Can I use two different spaces, that are both dedicated to the business?

After that, how do I calculate what percentage of the house is being used for the business? Do I just use the 1300 square feet mark, or do I calculate the total of the basement too? 

Then, what else am I able to write off? Internet (not cable) and cell phone is obvious--both are necessary for the business. Can I write them both off completely, even though they're used for personal use too?

What about my electric and water bills? I assume a portion of them can be for the business--I'd probably just use the same percentage that I did for the mortgage. 

Thoughts? Get an accountant?

FWIW, I ran through the numbers. Even with all of this it is more likely that I end up owing money than getting a refund. 

I would say you can make a reasonable assertion that you use the entire room for business, not just the desk area.

The 1300 sf number will typically not include a basement which is considered "unoccupied space".  Either ignore the storage room and work with 1300 sf as your base number, or include the storage room and add X sf (the total basement footprint) to that 1300 in order to keep the percentage correct.

Not sure if I explained that clearly - write off the storage room or not at your option, but if you include it, you need to add the areas located in the basement to both sides of the equation.

For power, I'd say you should prorate that based on the area ratio, then cut that number in half, because presumably you're not working 24 hours per day.

Let me also add that as long as you're talking relatively small numbers, you can pretty much use what you want, because your likelihood of getting audited is small.

Let me also also add that I am an architect, NOT an accountant, and my advice is worth what it costs.

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

Duke said:

I would say you can make a reasonable assertion that you use the entire room for business, not just the desk area.

The 1300 sf number will typically not include a basement which is considered "unoccupied space".  Either ignore the storage room and work with 1300 sf as your base number, or include the storage room and add X sf (the total basement footprint) to that 1300 in order to keep the percentage correct.

Not sure if I explained that clearly - write off the storage room or not at your option, but if you include it, you need to add the areas located in the basement to both sides of the equation.

For power, I'd say you should prorate that based on the area ratio, then cut that number in half, because presumably you're not working 24 hours per day.

Let me also add that as long as you're talking relatively small numbers, you can pretty much use what you want, because your likelihood of getting audited is small.

Let me also also add that I am an architect, NOT an accountant, and my advice is worth what it costs.

Relatively small numbers, yes, but not insignificant TO ME. It ultimately works out to about 10% of my total income, or 5% of the combined household income. 

In reply to mtn :

Sorry, I didn't mean insignificant.  I meant "relatively small on the IRS scale".

z31maniac said:

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

Different situation though--this isn't working from home; there is no office to work from except for my home. Imagine a painter who has his office in his house.

Also, this is not hobby income either.

Duke said:

In reply to mtn :

Sorry, I didn't mean insignificant.  I meant "relatively small on the IRS scale".

No need to apologize--just want to make it clear that if they were to actually audit me (low chance of that due to the small numbers in the grand scheme), the numbers aren't THAT small within my world. 

I really run a business from my house. I write off 10% of my house expenses as business and 100% of my business assets as business. 

Those business assets include 100% of a computer, printer, etc. I then went through and place a reasonable value on all the items such as my office desk, office chair, carpet in that room, other furniture, shelves etc. My business is auto related so my business assets also include any item in my garage that could be used to fix or maintain a car (Craftsman tool box, it's contents, floor jack, etc, etc.)  

Also (at least for my former s corp business) you  also need to have a separate entrance for the business.  We had a side door that led to the basement and I used that.  I went pretty willi nilli with write offs with my accountants blessing.

You really should get an accountant if you don't have one.  Mine was a frugal genius - I still use him now for just personal taxes.  But he helped set me up, answered all my write off questions, and would cover any audits (without me) if they happened.

Whats that old joke?  An Engineer, Scientist, and accountant were applying for the same job.  Interviewer asks: "What does 2 + 2 equal?"  Engineer says "four", Scientist says "four", Accountant leans forwards as whispers "How much do you want it to equal?" :)

You should get a CPA.

They added a new option that calculates the deduction based off of standard amount x Sq feet as an office. This may be beneficial to you.

Other account/CPA advice. Sure, there is a cost associated with using an account but a smart one will show you that they are saving you more money (through the knowledge of additional deductions) than they will cost. 

Would they do better than TaxAct.com/turbo tax?

I used to deduct business use of home back in the 70s and 80s.  The IRS pretty much tried to take it away be disallowing more and more things.  Toward the end it wasn't really worth it.  I'm sure it has changed in the last 30 years.   We have now used an accountant for the past 20 years.              

mtn said:

Would they do better than TaxAct.com/turbo tax?

Easy enough to find out.  Keep working up the Turbo Tax version and get to some end numbers.  Then, make an appt with an accountant.  Your meeting should include a lot of you telling him what your side business is, what your business activities are like, what you want to grow it to (or not), etc.  The accountant can then review your Turbo Tax version and find holes or gaps.  

Personally, I like having someone who "lives and breaths" this tax stuff so I don't have to and don't have to keep up with the changes.  

In reply to mtn :

If it's your first time claiming these expenses, probably. A good one usually provides a safety margin that you don't tend to get with mere software, because they're aware of grey areas that may not look so grey to you if you throw the numbers into turbo tax.

Enyar said:

You should get a CPA.

 

They added a new option that calculates the deduction based off of standard amount x Sq feet as an office. This may be beneficial to you.

Yeah, my cpa said similarly that there was basically a new standard deduction for home office expense and that itemizing it was never going to do better. I don't know what the standard is, but just claim it and be done.

z31maniac said:

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

This.  I had a home office for years, now the office is at my moms house, in my old bedroom no less.  Neither of us bother writing off home office space or trying to bother figuring out percentages of home utilities used for business.  I threw it in turbotax one year out of curiosity and for as many red flags it raises on your return it was sub $10 benefit.  It’s way more important to keep track of vehicle use for business than home office.  I do write off my equipment (computer, printer, ipad, phone, office supplies) that are used for the company.  Besides job materials though the biggest effect on lowering pre tax income is vehicle.  I was effectively paid back 3x over in tax savings for one of my trucks by using it long enough and documenting work use.  

I’m very similar to your imaginary painter, i’m a carpenter with a remodeling business and no store front.  My house is my command center.  Work trucks, trailers, tools live here.  My garage is eaten up by work stuff as is part of my basement.  For me it just wasn’t worth it, plus I have so many deductions and depreciating assets as a contractor that I usually have to fudge numbers in their favor to stay in the black and keep my audit risk low.  My ducks(receipts?) are in a row but I don’t want the hassle of being audited.  

Patrick said:

z31maniac said:

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

This.  I had a home office for years, now the office is at my moms house, in my old bedroom no less.  Neither of us bother writing off home office space or trying to bother figuring out percentages of home utilities used for business.  I threw it in turbotax one year out of curiosity and for as many red flags it raises on your return it was sub $10 benefit.  It’s way more important to keep track of vehicle use for business than home office.  I do write off my equipment (computer, printer, ipad, phone, office supplies) that are used for the company.  Besides job materials though the biggest effect on lowering pre tax income is vehicle.  I was effectively paid back 3x over in tax savings for one of my trucks by using it long enough and documenting work use.  

But do you own the company?

mtn said:

Patrick said:

z31maniac said:

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

This.  I had a home office for years, now the office is at my moms house, in my old bedroom no less.  Neither of us bother writing off home office space or trying to bother figuring out percentages of home utilities used for business.  I threw it in turbotax one year out of curiosity and for as many red flags it raises on your return it was sub $10 benefit.  It’s way more important to keep track of vehicle use for business than home office.  I do write off my equipment (computer, printer, ipad, phone, office supplies) that are used for the company.  Besides job materials though the biggest effect on lowering pre tax income is vehicle.  I was effectively paid back 3x over in tax savings for one of my trucks by using it long enough and documenting work use.  

But do you own the company?

I was adding another paragraph while you replied.  Yes.

Patrick said:

z31maniac said:

I work from home a few days per week, I asked my accountant about write-offs and the like.

"It's absolutely not worth the miniscule amount you save and the potential for audits."

That's not verbatim, but it's close enough.

This.  I had a home office for years, now the office is at my moms house, in my old bedroom no less.  Neither of us bother writing off home office space or trying to bother figuring out percentages of home utilities used for business.  I threw it in turbotax one year out of curiosity and for as many red flags it raises on your return it was sub $10 benefit.  It’s way more important to keep track of vehicle use for business than home office.  I do write off my equipment (computer, printer, ipad, phone, office supplies) that are used for the company.  Besides job materials though the biggest effect on lowering pre tax income is vehicle.  I was effectively paid back 3x over in tax savings for one of my trucks by using it long enough and documenting work use.  

I’m very similar to your imaginary painter, i’m a carpenter with a remodeling business and no store front.  My house is my command center.  Work trucks, trailers, tools live here.  My garage is eaten up by work stuff as is part of my basement.  For me it just wasn’t worth it, plus I have so many deductions and depreciating assets as a contractor that I usually have to fudge numbers in their favor to stay in the black and keep my audit risk low.  My ducks(receipts?) are in a row but I don’t want the hassle of being audited.  

Just in case you haven't thought about this, I hope you have a business policy on all your tools/supplies, your regular Homeowners policy won't cover it at all, or at a very small limit like $1000 total.

z31maniac said:

 

Just in case you haven't thought about this, I hope you have a business policy on all your tools/supplies, your regular Homeowners policy won't cover it at all, or at a very small limit like $1000 total.

Spoken like someone who's seen some E36 M3. 

Ex-state farm claim rep. I worked theft claims.

It was gut wrenching to tell someone like a plumber/electrician/etc, "Yes, I know you just lost everything to make your living, and it was more than $10,000 in tools. But the most I can pay you is $1000 for business property."

Calls like that sucked.

z31maniac said:

Ex-state farm claim rep. I worked theft claims.

It was gut wrenching to tell someone like a plumber/electrician/etc, "Yes, I know you just lost everything to make your living, and it was more than $10,000 in tools. But the most I can pay you is $1000 for business property."

 

Calls like that sucked.

My wife thought I was crazy when I went around and videotaped literally everything in our house with my iPhone and then loaded it to a private youtube channel. But I'll be damned if the house goes up in flames and I don't have proof of everything in that house. Replacing a vintage Willet dining room set is not exactly cheap, even at replacement costs.

That's a fantastic idea. We always told people to do something similar, yet I've never done it myself.

 

Just in case you haven't thought about this, I hope you have a business policy on all your tools/supplies, your regular Homeowners policy won't cover it at all, or at a very small limit like $1000 total.

Totally.  Have business policy as well as a $60,000 rider on homeowners policy for tools/contents of the garage