A lot of Wave customers have home-based businesses, or use an office at home to supplement their physical business location. I bet you know what’s coming: Make sure you account properly for the expenses around your home office throughout the year, to reduce your taxable income.
As always, every jurisdiction has its own tax rules, so make sure you find out how things apply in your case. But here are a few rules of thumb to get you going.
A home office is any part of your residence that you allocate as a work environment. This could be a real office with four walls and a door, or it could be your kitchen table or a desk area in a bedroom — whatever space you regularly use to do your work in the home.
Also worth noting: You don’t have to own the property for it to qualify. It could just as easily be a rental space.
How much can I deduct?
When claiming expenses related to a home office, start by figuring out the percentage of home expenses that can be claimed. You do this by determining the the square footage of your home and the square footage of your office space. If your home is 1,000 square feet and the space for your office is 50 square feet, then the percentage is 5%.
This means that 5% of many home expenses can be attributed to your home office, and therefore can be used as a deduction.
What can I deduct?
You would apply the percentage (5% in our example) against your utilities, insurance, property taxes, rent expense, mortgage interest, repairs and maintenance. These direct home expenses are ones that relate directly to the work space.
You need to be careful of claiming items that don’t relate directly. Things like lawn maintenance or painting the new baby’s room probably don’t pass the test.
There are other expenses you can claim where you do not have to apply the square footage expense. For example, if you buy office furniture or have a business phone line, you can claim 100% of the costs.
For other items like an Internet connection or your home phone line, you should be able to apply a percentage based on how they get used, instead of using the square footage calculation.
Home Office deductions in Wave
So how would you do all of this in Wave? Well, there are a couple of ways.
- When you have an expense that’s part business and part personal, immediately split it into the right business and personal proportions and categorize them accordingly (see the video below).
- When you get each expense transaction in Wave, categorize the full amount of the expense as Personal. At the end of the year end, do a Journal Entry that transfers the right dollar amount over to your Business expenses. (You can also do the reverse: assign it all to Business, and then do a Journal Entry assigning a proportion back to your Personal side.)
My preference is #1. That way you handle all your expenses as they come in and you are less likely to forget an expense that could save you some tax dollars.
Video Tutorial: Splitting transactions
Wave Accounting provides this information as a guide to get you started. When it comes to actually reporting financial details to the government, you should check with your accountant or reference the rules in your jurisdiction to see how they apply to your unique situation.
The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”