Working From Home?
Are you a freelancer or a small business owner who operates out of a home office? If so, you may be eligible to deduct some of your home office expenses on your taxes. Deducting your home office can save you money and help you maximize your tax benefits.
1. Exclusive and Regular Use
In order to qualify for a home office deduction, your home office space must be used exclusively and regularly for business purposes. This means that you cannot use your home office for personal activities, such as watching TV or playing video games. It must be a dedicated space solely for your business.
2. Principal Place of Business
Your home office must also be your principal place of business. This means that it is the primary location where you conduct your business activities or where you meet with clients or customers. If you have another location where you regularly conduct business, you may not be eligible for a home office deduction.
3. Square Footage Calculation
In order to determine the amount of your home office deduction, you will need to calculate the square footage of your home office space. Measure the total square footage of your home and then measure the square footage of your home office. Divide the square footage of your home office by the total square footage of your home to get the percentage of your home that is used for business purposes.
4. Simplified Option
If you don't want to go through the hassle of calculating and keeping track of your actual expenses, you can opt for the simplified option. With the simplified option, you can deduct $5 per square foot of your home office space, up to a maximum of 300 square feet.
5. Direct and Indirect Expenses
When deducting your home office, you can deduct both direct and indirect expenses. Direct expenses are those that are solely for your home office, such as painting or repairs. Indirect expenses are those that are related to your entire home, such as mortgage interest, property taxes, and utilities. These expenses can be deducted based on the percentage of your home that is used for business purposes.
6. Self-Employment Taxes
If you are self-employed and deducting your home office, you may also be able to deduct a portion of your self-employment taxes. This can provide additional tax savings and help offset the costs of running your business.
7. Keep Detailed Records
Lastly, it's important to keep detailed records of your home office expenses and any supporting documentation. This includes receipts, invoices, and any other relevant paperwork. These records will be crucial in case of an audit and will help ensure that you are accurately claiming your deductions.
By following these 7 rules, you can confidently deduct your home office for taxes and take advantage of the tax benefits available to you. Remember to consult with a tax professional or accountant to ensure that you are following all the necessary guidelines and maximizing your deductions. Deducting your home office can provide significant tax savings and help you keep more money in your pocket.
A Few Other Things to Consider
Follow these additional tips to avoid raising any eyebrows at the IRS when you file your tax return, which is due on April 15, of each year.
1. You can’t claim it if you’re a regular employee, even if your company requires you to work from home.
If you’re employed by a company and you work from home, you can’t deduct home office space from your taxes. This applies whether you’re a permanent remote worker or if your office still hasn’t returned to in-person operations because of COVID-19. The rule of thumb is that if you’re a W-2 employee, you’re not eligible for a work-from-home tax deduction.
2. If you have a regular job but you also have self-employment income, you can qualify.
If you’re self-employed — whether you own a business or you’re a freelancer, gig worker or independent contractor — you probably can take the home office deduction, even if you’re also a full-time employee of a company you don’t own. It doesn’t matter if you work from home at that full-time job or work from an office, as long as you meet the other criteria that we’ll discuss shortly.
3. It needs to be a separate space that you use exclusively for business.
The IRS requires that you have a space that you use “exclusively and regularly” for business purposes. If you have an extra bedroom and you use it solely as your office space, you’re allowed to deduct the space — and that space alone. So if your house is 1,000 square feet and the home office is 200 square feet, you’re allowed to deduct 20% of your home expenses.
But if that home office also doubles as a guest bedroom, it wouldn’t qualify. Same goes for if you’re using that space to do your day job. The IRS takes the word “exclusively” pretty seriously here when it says you need to use the space exclusively for your business purposes.
To avoid running afoul of the rules, be cautious about what you keep in your home office. Photos, posters and other decorations are fine. But if you move your gaming console, exercise equipment or a TV into your office, that’s probably not. Even mixing professional books with personal books could technically cross the line.
4. You don’t need a separate room.
There needs to be a clear division between your home office space and your personal space. That doesn’t mean you have to have an entire room that you use as an office to take the work-from-home tax deduction, though. Suppose you have a desk area in that extra bedroom. You can still claim a portion of the room as long as there’s a marker between your office space and the rest of the room.
5. The space needs to be your principal place of business.
To deduct your home office, it needs to be your principal place of business. That doesn’t mean you have to conduct all your business activities in the space. If you’re a handyperson and you get paid to fix things at other people’s houses, but you handle the bulk of your paperwork, billing and phone calls in your home office, that’s allowed.
There are some exceptions if you operate a day care center or you store inventory. If either of these scenarios apply, check out the IRS rules.
6. Mortgage and rent aren’t the only expenses you can deduct.
If you use 20% of your home as an office, you can deduct 20% of your mortgage or rent. That’s not all you can deduct. You’re also allowed to deduct expenses like real estate taxes, homeowners insurance and utilities, though in this example, you’d be allowed to deduct only 20% of any of these expenses.
Be careful here, though. You can deduct expenses only for the part of the home you use for business purposes. So using the example above, if you pay someone to mow your lawn or you’re painting your kitchen, you don’t get to deduct 20% of the expenses.
7. Relax. You probably won’t get audited if you follow the rules.
The home office deduction has a notorious reputation as an audit trigger, but it’s mostly undeserved. Deducting your home office expenses is perfectly legal, provided that you follow the IRS guidelines. A more likely audit trigger: You deduct a huge amount of expenses relative to the income you report, regardless of whether they’re related to a home office.
It’s essential to be ready in case you are audited, though. Make sure you can provide a copy of your mortgage or lease, insurance policies, tax records, utility bills, etc., so you can prove your deductions were warranted. You’ll also want to take pictures and be prepared to provide a diagram of your setup to the IRS if necessary.
As always, consult with a tax adviser or consider using tax prep software if you’re not sure whether the expense you’re deducting is allowable. It’s best to shell out a little extra money now to avoid the headache of an audit later.
Presented by Coach Trina at Dragoyle.com
