Hi guys, you are my heroes!
Based on just the details within your YouTube videos (esp. the early videos back in 2022) and MSB podcast, I got so inspired. In 2023 I took it to the next level, and - using the same skills for which I would ordinarily be paid a salary – instead formed a services LLC, went S-corp election, did all the nifty (and dare I say sophisticated) strategies I learned from you both, like classifying healthcare premium contributions for my family as a sub-type of employee-owner’s (my) compensation (yet those payments counting toward the required reasonable salary, too!), and dialed it in with just the right amount of salary (using Mark’s matrix, but taking advantage of “allowances to be lower / flexible for first year of operation”) to sock away nearly 30K into a solo 401(k), based on the applicable $ and % limits (including maximizing the employer’s match at 25% of the total salary).
Here’s my question.
My wife also has a side business: it’s a bakery. Presently just an LLC, so lands on our Sch. C.
In 2023, she had a loss, so I am looking at our 2023 Sch. C line 30 (and the two fill-in blanks within it).
The space she uses is an “administrative desk” which is ~50 sq. feet, it is in a common playroom that our kids use, however, that desk is used exclusively for business.
Before I knew the nuance on home office deduction allowance, I thought we could get the $1500 deduction, but I found out that we could not use the “simplified method” i.e. 300 sq. ft x $5 = $1500" deduction: the CPA explained that we can’t use that method of deduction if we already claiming a loss on that Sch. C - i.e. cannot increase the loss further…
That makes sense. However, the CPA had said that we could still use the actual method deduction for that year, so I provided the details of mortgage, HOA, etc., the home total is 2700 sq. ft. – to my tax CPA and he said he would make the adjustment for that extra expense.
Thus, our 2023 Sch. C, the actual method home office deduction of $300 is incorporated into other expenses (Sch. C line 27).
Now, for 2024 tax year, my wife made a solid profit in that business to the tune of $6,000.
So on our 2024 Sch. C Line 30, I again see the “50” admin desk and the “2700” total home, but now I do see the $250. So in a way, the information I had already supplied (in 2023) limited us to only $250… I kind of expected to be able to deduct the full $1,500 (since we have a solid profit). It sounded from your Videos that the simplified claim could be done without much ado or risk of scrutiny. So, did my CPA do the right (conservative?) thing by only letting us deduct the actual, rather than the full simplified amount – based on the “50” I had supplied earlier, and without me having supplied the actual numbers for the actual calculation? Or do I see the actual method applied – and not simplified because of some other reason?
Can we do the $1,500 deduction next year (also overall profit). I will be changing the tax firm anyway, for unrelated reasons, should I politely ask the new tax person to apply the $1,500 – or are we now stuck with the actual method at $250 and cannot switch to the full simplified deduction ever for that business (unless we increase working space) – because we already have “evidence” that actual space is 50 sq. ft? Would it be OK to switch to the $1,500 for 2025 and not think too much about it – but without any actual changes to the business use square footage? Please advise.