With so many people side hustling or working from home, here’s a refresher on what qualifies as a write-off and who qualifies for the home office deduction.
Write-offs. The magical word that puts self-employed and freelance folks at ease. Why? Because in the world of self employment, when taxes are paid out of pocket instead of by an employer, it’s vital to keep track of what is a tax deduction and what is not. If you work from home, that means keeping track of household and home office expenses.
Water, electric, internet, and heat are just a few line items that may qualify for some sort of home office tax deduction. However, before you get too excited about all the money you are going to save by writing off part of your home and affiliated expenses, it’s important to ensure you are following the rules set by the Internal Revenue Service.
What is the home office deduction?
In order to qualify for the home office deduction, you must be self-employed or an independent contractor. Due to the Tax Cuts and Jobs Act of 2017, salaried workers who work from home no longer automatically qualify.
Additionally your space must meet the following conditions, according to Flexjobs:
- You must use the office regularly and exclusively for your business.
- The home office should be the principal place of business.
The terms for claiming a home office space are simple. It needs to be the place where you do the majority of your work and it can’t be a multi-use space within your home — so a lap desk propped onto your living room sofa in front of the TV doesn’t count. A sectioned-off area of your home — for example, a designated space in your living room or finished basement — would count, but only if you exclusively use that space for business purposes.
What if you use a coworking space?
If you typically spend the majority of your work week in a coworking space and not your home office, you cannot consider your home office as your principal place of business.
Does this mean only freelancers qualify for home office tax breaks?
Not at all!
With a rising number of Americans working from home, there are other ways to qualify for the home deduction. However, the process does become a little more complicated for regular employees. It is possible for traditional employees to seek the deduction if their role fits certain criteria.
According to Alexandra Levit at Flexjobs, the deduction can apply if the employer requires an employee to work from home. Levit wrote the following:
If your employer provides you a place to work, but you prefer to work at home, you are not eligible for the home office deduction. An ‘employer-provided office’ can include a coworking space, but does not include a coffee shop.’
Additionally, Levit wrote:
Homeowners are not the only people who can claim the home office deduction. Renters are also eligible to claim the deduction if their home office meets IRS guidelines.
One note: More people are working from home in 2020 due to the impact of the coronavirus on businesses and statewide stay-at-home orders across the country. With these requirements in place that are forcing more people to work from home, you may want to check with your accountant to see if your home office is eligible for these tax benefits. According to this Forbes article, the outcome may not be promising, but it may be work tracking your expenses in case the rules happen to change in the upcoming tax year.
Claiming the home office deduction can be simple or include specific calculated deductions.
Maurie Backman makes these two different types of deductions simple for Fool.com:
The simplified method
You can claim a $5 deduction per square foot of your home office, up to 300 square feet. Under this method, your deduction maxes out at $1,500.
Deducting actual expenses
You deduct the actual cost of the business expenses you encounter in the course of working out of your home. There are two types of expenses you can deduct:
Direct expenses are costs that relate specifically to your business like furniture for your office or a new computer or specific software to run your operation. These deductions can be made in full on your tax return.
Indirect expenses are costs that are necessary for your business, but are not exclusive to your business. They may also pertain to your home, and can include utilities and bills like heating, insurance, electricity, or even a mortgage.
What qualifies as a business expense?
A business expense must be ordinary and necessary to constitute as a business expense.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
If you’re a travel agent, you’re probably stocking up on things like pamphlets and folders for your clients. Essentially, if you’re a business owner, and need supplies to run your small business operation, they will most likely be an eligible tax expense. But this deduction is not meant for outrageous purchases that you could not prove necessary for your work if you were to face an audit.
As Levit writes, while you need a chair for your office desk, you don’t need a heated massage chair to run your business.
A simplified home office deduction list
While this list isn’t a cover-all for home office deductions, it will give you a good place to start if you decide to take the “actual expenses” route:
- Office decor
- Supplies (notepads, pens, etc.)
- A portion of mortgage interest and rent
- A portion of real estate taxes
- A portion of security system coverage
- Repairs such as fixing walls, floors, leaks, plumbing, and roofing
- A portion of utilities, like electricity, gas, heat, and water
- Trash removal
- Cleaning services
- Casualty losses (volcanic eruption, fire, earthquake, tornado, hurricane or flood, etc.)
- Equipment (printers, computers, etc.)
- Secondary or business specific telephone lines
Maintain good records
Although there are myths of home office deductions triggering IRS audits, tax laws in the 90s actually reduced the likelihood of that happening. So long as you have a good record-keeping system in place, you should be good to go, even if you end up in the half of one percent of taxpayers that do receive an audit.
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