AAB - How do I record home office deductions in my books?

Q&A: Recording Home Office Expenses When Cash is Tight

The Question:

"I run my business from my home office. My accountant has told me a list of expenses I can declare, which include 12.34% of my home internet bill, 12.34% of my electric bill, and 12.34% of my rent. Do I actually have to pay myself that money to record it? Business cash is pretty tight right now, how can I record these transactions if no money actually changes hands?"

Our Answer:

This is a fantastic and very common question, especially for new or growing home-based businesses where cash flow is a key concern. You're absolutely right – you don't need to physically transfer money from your business account to your personal account for these deductible home office expenses. The key is to accurately reflect the value of the business's use of your home in your books, even when no cash is exchanged.

The solution lies in using what we call a "wash" account, often named a "Barter/Trade" account, combined with an equity entry. This method allows you to record the expense and acknowledge the business's obligation to you, without actually impacting your immediate cash flow.

Here’s how to set it up in QuickBooks Online:

Step 1: Create a "Barter/Trade" Payment Account

First, you'll need a dedicated "wash" payment account. We like to create "Trade/Barter" accounts in all of our clients' books.

• Go to your Chart of Accounts (Accounting > Chart of Accounts).
• Create a new account.
• Account Type: Select "Bank."
• Detail Type: You can choose "Checking" or "Cash on hand." We generally prefer "Checking" to keep your "Cash on hand" accounts specifically for real cash accounts.
• Name it Barter/Trade.

This account will temporarily hold the "payment" for your home office expenses.

Step 2: Record Your Home Office Rent Expense

Let's use your example: your rent is $1,000 a month, and 12.34% is deductible, which comes to $123.40.

• Create Yourself as a Vendor: If you don't already have a vendor account in your personal name (e.g., "Owner - John Doe"), create one now. Your business is essentially "paying" you for the use of your home office space. Unless your business is actually paying your landlord directly, you are the vendor for this transaction. Your business pays you (in equity), and then you, personally, pay your landlord.
• Create the Expense: Go to "Expenses" > "Expenses" (or "New" > "Expense").
  • Vendor: Select your personal vendor account (e.g., "Owner - John Doe").
  • Payment Date: Set the date correctly. This should be the same date listed on your personal rent bill. So, if rent is due on the 1st, the expense date should be the 1st.
  • Payment Account: Crucially, select your newly created "Barter/Trade Account."
  • Category: Select the appropriate expense account, typically "Rent or Lease of Buildings."
  • Amount: Enter the deductible amount: $123.40.
  • Memo: Add a descriptive memo, e.g., "Home Office Rent - [Month/Year]."

At this point, your business now has a recorded expense for $123.40, effectively "paid" from your imaginary "Barter/Trade Account." This account will now show a balance of -$123.40.

Step 3: Clear the Barter/Trade Account with an Equity Entry

This step "washes" out the temporary balance in your Barter/Trade account and properly credits your owner's equity.

• Create a Journal Entry: Go to "New" > "Journal Entry" (often found under "Other" in the "New" menu).
  • Date: Use the same date as your rent expense entry.
  • Line 1:
    • Debit: Select your "Barter/Trade Account."
    • Debit Amount: Enter $123.40.
    • Description: "To clear home office rent expense."
  • Line 2:
    • Credit: Select your "Owner's Contribution" equity account (if you don't have one, create it now – or use "Owner's Equity" if applicable).
    • Credit Amount: Enter $123.40.
    • Description: "Owner's contribution for home office rent."

This journal entry effectively increases your "Owner's Contribution" equity account by $123.40 (representing the value you've provided to the business by letting it use your home), and it brings the "Barter/Trade Account" balance back to zero.

Step 4: Document Everything!

This is crucial for audit defense and justification:

• Attach Documentation: Be sure to make copious notes within QuickBooks for both the expense and the journal entry.
• Upload Supporting Files: Attach a copy of your personal lease agreement, any schematics you've made of your office space (showing its square footage relative to your home), and any calculations you performed to justify the 12.34% deduction. Taking photos of your dedicated home office setup would also be a good idea and can be stored digitally alongside your documentation.

Step 5: Repeat for Other Expenses

Now, repeat this same process for your home internet and electric bills:

• Home Internet: Create an expense from your "Owner - [Your Name]" vendor, paid from "Barter/Trade Account," categorized as "Utilities: Internet" (or similar), for 12.34% of the bill. The date should match the date on your internet bill.
• Electric Bill: Do the same for your electric bill. The date should match the date on your electric bill. So, if your electric bill is due by the 17th, that's the date of the expense entry.

Important Considerations for Recurring Expenses:

• Recurring Transactions: For consistency, you can often make the expense entries (Step 2) for rent and internet recurring transactions in QuickBooks. This saves time each month.
• Monthly Review & Single Journal Entry: You can make all these expense entries as they occur throughout the month. Then, at the end of each month, after all home office expenses are recorded, you can use one single journal entry to zero out the "Barter/Trade Account" for the entire total. This is the perfect time to double-check variable bills like electricity and ensure internet/phone bills remain static, making any necessary edits to the automatically created transactions.
• Variable Bills: Your electric bills will likely vary month to month. For these, you'll still create the recurring transaction, but you will incrementally have to go into the automatically created transaction each month and edit the total amount to be accurate to that specific bill.
• Review Monthly: Even if recurring, every month's transactions should be reviewed to verify nothing has changed and amounts are correct. Telephone and internet bills tend to remain static but always double-check.

By using this "Barter/Trade" account method, you accurately record your legitimate home office deductions without impacting your business's cash flow, keeping your books clean and ready for your accountant!

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