Profitable Painter Podcast
Profitable Painter Podcast is a rich resource for anyone interested in starting, running, and scaling a professional painting business, offering valuable insights, strategies, and interviews with industry leaders. Through case studies and in-depth discussions, we deliver a vivid picture of the painting industry, with a disclaimer that any financial or tax information is general and not a substitute for professional advice.
Profitable Painter Podcast
Maximize Your Tax Savings: Unlocking Home Office Deductions for Painting Business Owners
Unlock the secrets to maximizing your tax savings with expert insights from Daniel, the founder of Bookkeeping for Painters, and Richard, the advising director. Discover how the home office deduction can transform your business finances, whether you're an entrepreneur running a painting company or managing a side hustle. This episode promises to arm you with practical strategies to leverage IRS home office definitions, ensuring that every square foot of your dedicated workspace contributes to lowering your tax bill. From the simplified method to corporate complexities, we cover it all, helping you claim a portion of your home expenses as valuable business deductions.
Embark on a journey to smarter tax deductions as we explore not just the basics but the intricacies of home office use. Even if your workspace is part-time, learn how it can still qualify for significant savings. We'll unpack the benefits of additional deductions, such as business mileage and office upgrades, and reveal how accountable plans for S-Corps or C-Corps can facilitate tax-free reimbursements. This is your guide to turning home office expenses into a powerful tool for reducing taxable income and boosting those tax refunds. Whether you're a family member supporting a side gig or a seasoned business owner, this episode is your roadmap to savvy financial management.
This is Daniel, the founder of Bookkeeping for Painters and this is Richard, the advising director and we've got some really cool tax saving strategies to talk about today, Something that I think almost every business owner can benefit from, and possibly other family members too, if they have a side gig or a side hustle. This is probably one of the most popular topics that comes up in our tax planning, and that is the home office deduction. I think it's something that people hear about a lot but might not know how to implement it, or at least how to get the most out of it. So, Daniel, I thought maybe we could talk a little bit today about how that works. Whether you're a sole proprietor side hustle or you've got a corporation, the home office deduction is available. How you're going to go about getting it's going to be a little bit different, and I thought we could talk about the ins and outs on that.
Speaker 1:Yeah, let's do it. I think this is a great deduction strategy for painting business owners because more often than not especially from the zero to $1 million phase most folks are doing a lot of administrative work out of their homes and some of them don't realize that, hey, I can actually get some money back from the government because I'm using this dedicated area in my home to do work for my business and this can actually result in a tax deduction. So it's perfect for a lot of painting businesses that don't have a separate office, that already established, and in some cases, even when they do have a separate shop or something. It might even apply in some of those cases as well. So I think this is great.
Speaker 2:Yeah, absolutely so. I think the first thing we have to understand is you know what do we mean by a home office. They can take a lot of different shapes, sizes, looks, but the IRS definition of a home office is an area that is used regularly and exclusively for business. Now, it's a little bit of a vague definition. It does not necessarily have to be a dedicated room. You know, personally, I have one of my.
Speaker 2:We have a three-bedroom house and so our smallest bedroom is my office. But you don't have to have a separate room. You could use a dedicated portion of your living room or a portion of your family room for your office, as long as that area is used exclusively for business. Where you could get in trouble is if you do business in an area that's also used for personal use. So think, like you know, if you were to set up your laptop at your kitchen table, that you just had dinner at and you do some work, that does not turn your kitchen table into a home office, because it's also being used personally. So we want to be careful that we keep things exclusive, and it does matter in an audit. I have heard some horror stories of the IRS denying deductions because of that.
Speaker 1:But you know, I was going to say because if we could just work anywhere in our homes and it would be deducted, my whole house, like every square inch of my house, would be deductible, because I'm literally just working everywhere in my house like throughout the day. So that's, that's too bad, because I'm always working in my house every which way that the kitchen table, if it's in my room, or whatever. So that sucks. So we got to actually choose a place and use it regularly and exclusively in one place. It sounds like.
Speaker 2:Yes, yes, you are taking a small portion or maybe a large portion of your home and saying I'm no longer going to use this for personal use, this is just for business, and that portion can be deducted. The other qualification and this one does come with a caveat is that it needs to be the principal of business. So what you can't do is rent an office downtown, deduct all the rent on that space and then also have a home office that is your principal place of business and deduct the expense of that place. You can imagine a situation where you have multiple offices all over the place trying to take deductions and that doesn't work. If you're going to write off a spot in your home, it does need to be the principal place of business. However, there is a little bit of a carve out here.
Speaker 2:Some people, especially painters, may have an industrial area that they keep their trucks and supplies and materials, but there's no part of that industrial area that's suitable for administrative or management tasks. They might not have a nice office that's air-conditioned and appropriate for running the business. In that case, you can have an administrative office in your home, as long as it is the principal place where you're running your business and doing the administrative and management work in addition to an industrial area or a retail storefront or something like that. But you do have to pick one space that's going to be the administrative center of your business and, like we mentioned, you know it doesn't have to be fancy. You know, fold out desks, convert a corner of a room, maybe get some of those. You know, I wouldn't say build a cubicle in your family room your spouse might not appreciate that but maybe one of those nice little screens, that kind of block thing off a little bit, that would be a great way to kind of dedicate an area as your administrative office. So once we've decided that we do have a home office, now we can talk about how much we're going to be able to write off.
Speaker 2:So there's two ways of doing this. I'm going to start off with the simple and easy way, and this way applies if you are a sole proprietor, and then we'll talk about the more difficult way. And if you have a corporation, then you're going to be stuck doing the more difficult way. But let's talk about the simplified method. The IRS has a shortcut method. It is you take the square footage of your home office and you multiply that by $5 per square foot up to a maximum of 300 square feet. So if your third bedroom is 10 by 12 feet, that's 120 square feet. That is $600 that you can write off using the simplified method. What's cool about that is that you don't need to keep any receipts. You don't need to worry about your mortgage interest or your property taxes. You definitely don't have to worry about depreciation. It's just quick, easy five bucks per square foot Perfect for smaller homes or people who don't want to have to keep complex records.
Speaker 1:And that's $600 for the year as a deduction, not per month.
Speaker 2:Yes, yeah, I'm sorry, it's $5 per square foot per tax year.
Speaker 1:Yeah, and so if you're thinking to yourself, that doesn't seem like very much for a significant portion of my home, like a whole bedroom, to be dedicated to a home office. Well, this is the easy way. So the IRS is going to make it easy, but it's going to be favorable to them to claim this type of deduction the simplified method per square foot, and it's easy, but it's not going to likely be the most advantageous the most tax deductions versus the other method that you're about to cover.
Speaker 2:Yeah, yep, that's true, there is a trade-off there. Now the regular method is where we have to do some math and that is where we're going to figure out a percentage of the home expenses. So, again, we need to know the square footage of our dedicated space that we're using as a home office. I'm going to stick with my 120 square foot example and then we need to know the square footage of the entire house. So if you have 120 square foot office and you live in a 2,000 square foot home, you divide 120 by 2,000 and you come up with 6%. That means you're going to be able to write off 6% of your household expenses. So the interest on your mortgage we'll talk about the mortgage payments a little bit later Property taxes, utilities, repairs and maintenance, anything that affects the entire home as a whole, you're going to write off 6% of that. You're also going to write off direct expenses. So if you had to pay to repaint that office to make it suitable, that's a direct expense to that room. That's going to be 100% deductible. Same thing if you had to replace the flooring or maybe the window treatments those direct expenses that affect the home office directly. Those are 100% deductible.
Speaker 2:Now what about your actual mortgage payment, because that's probably your biggest expense? Well, we don't write off mortgage payments because those are loans, but we can write off depreciation. This is where it does become a little bit tricky. Your house is going to be depreciated over 27 and a half years, so you're going to take the original purchase price of your home plus any significant money that you've put into your house through like remodels or add-ons or things like that, and you're going to add that together to come up with your basis, and then you're going to divide that by 27 and a half and multiply it by 6%. So easy, easy right Like I have to get the back of the napkin in the calculator, but that's going to be your depreciation expense on your home office. And this is why I kind of steer people towards the simplified method a lot of times, because this is a lot of math and, in addition, it's a lot of record keeping too right, because we would need to be able to prove these expenses if we got audited.
Speaker 2:And finally, there's one other downside of the regular method, and that has to do with when you sell your home. See, normally when you sell your home, as long as you don't make more than $250,000 of profit per spouse, you don't need to worry about taxes. But if you use the regular method and you start taking tax deductions for the depreciation on your home, you have to recapture that depreciation when you sell, basically pay those tax deductions back, and that can be a real pain in the neck when it comes time to sell your house. So if you are going to do the standard regular method, you probably want to talk to your accountant and make sure you have a plan for handling that. And if you're thinking, well, I like the standard method but I don't want to have to worry about depreciation recapture, so I just won't take the depreciation portion.
Speaker 2:Unfortunately, that doesn't work. The standard is you must account for depreciation that is allowed or allowable, which means even if you didn't take it, the IRS still requires you to pay it back. So have a conversation with your tax professional before you go down that road. All right, what if you're only using the office, say part-time? You're only using the office, say part-time. Well, that definition of regular is a little ambiguous. You don't need to spend 40 hours in your home office in order to have it as a deduction. You know, even just a few hours a week, as long as it's on a somewhat regular basis a week, as long as it's on a somewhat regular basis, would qualify for that deduction. It still has to be exclusive right, so we can't be using it to put up our relatives during the holidays or have like a man cave when we're not working. But we don't have to feel like we need to be in there for hours and hours on end in order to qualify.
Speaker 1:What you could do is, in your man cave, allocate a specific area that you use regularly and exclusively for business, as long as the man cave activities are not occurring in that area. So it could be a portion of that room in your man cave, right.
Speaker 2:Yes, it would be like an office cave in the man cave in your house. You have, like inception level deductions going on here. But no, you're absolutely right, daniel. Of course, whatever you know, you wouldn't write off the entire man cave, just the corner that you've sectioned off for sure, and this is nice. Maybe you have a family member who has a side hustle and they want to take an office deduction too. Have them carve out a spot, even if they only use it part-time, as long as it's exclusive for business, they can get that deduction off of their business taxes as well.
Speaker 2:All right, why does this really matter? Well, I mean, one, we're saving money, right, obviously. But two, we're also unlocking some additional tax deductions. One of the big ones has to do with auto mileage, and we're very familiar with taking our mileage as a tax break. But we want to be careful that we're not including what's known as commuting miles.
Speaker 2:So if you drive your car from your home to your rented space that you do business out of, that commute is non-deductible. Once you leave your rented space and maybe go to a work site or go do some estimates, drop off some proposals, that would be business mileage. But the drive from your home to your primary place of business is a commute and non-deductible. Well, what if your primary place of business is also your home? Now, whenever you jump in the car, you've just added extra mileage that can be written off.
Speaker 2:So, for example, the difference between having a rented space 10 miles away from your house and having your home as your primary admin place of business an extra 10 miles a day times five days a week, times 50 weeks a year, if we were to use, say, the 70 cents per mile, we would be looking at about an additional $1,750 of tax savings per year. So just something to kind of think about. You know, on top of the regular home office deduction, we could be unlocking some extra things too. There's even opportunities to put artwork and decorations in your home office. I believe you're allowed up to $300 for artwork, so maybe it's a good opportunity to get that um, you know copy of the Picasso that you've always wanted, that that inspires you to to paint.
Speaker 1:So you can go.
Speaker 2:You can go purchase some artwork and put it in your home office and deduct that up yeah, maximum up to 300 yeah, I mean it should probably be like office appropriate artwork, but you know, dogs playing poker. If that inspires you to to, that's fine. But yeah, um, you know same thing with like window treatments. Um, good chance to to repaint the room or replace the flooring, replace the lighting and get the deduction for that. All right, we mentioned S-Corps, so S-Corps and C-Corps are a little bit different. We're not able to use the simplified method with the S-Corp and we're actually not able to directly deduct things with the S-Corp. We have to do a little bit of a roundabout method and it's not a problem. That's why we have accountable plans. So an accountable plan if you've been listening, you know this already it's a fancy reimbursement plan that meets IRS requirements. Reimbursement plan that meets IRS requirements, and so the company, the corporation, is going to reimburse you for the use of your home. You can't use the $5 per square foot simplified method. You're going to have to actually go and do the standard method. But once you figure out what those amounts are, you're just going to have the corporation write you a check and reimburse you. Now, that payment is a rent expense to the corporation. That's how you get your tax deduction and the money you receive as the employee who's being reimbursed is not taxable to you. So it's a nice way to get some tax-free distributions out of your company while still getting the office deduction. Additionally, you might have equipment, supplies, office expense that you want to put on your accountable plan. You may be storing inventory materials, things like that. Make sure that you're getting reimbursed for that as well. And if you do drive your personal vehicle for the business, track your miles, pay for the expenses yourself, track your miles and have the company reimburse you. It's up to $0.70 per mile in 2025. That's the highest it's ever been. It can usually be pretty lucrative as long as you have a vehicle that's somewhat fuel efficient and not too terribly expensive to operate.
Speaker 2:So the home office deduction as a financial strategy. It reduces your taxable income. It boosts the amount of the refund that you're going to get. It's a great opportunity to have the IRS help you pay for something that you're paying for already. It does not require you generally to spend new money we're going after missed deductions here and it can also help unlock savings for family members who have their own side hustles or part-time entrepreneurs. I think it's a great opportunity. It's something that often gets missed, and so if you can carve out a spot of your home, it is definitely worth trying to do that. Trying to do that If you have any questions about the home office deduction or making sure that you dot your I's and do it correctly, you can certainly ask those in our Facebook group, grow your Painting Business. We'd love to see your comments there and answer any questions that you have. And until next time, we appreciate you listening and we'll have some more tax saving strategies on the next episode.
