A Refresher on Home Office Write-Offs
Write-offs, the magical word that may put 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 is vital to keep track of what qualifies as a tax deduction and what does not. If you work from home, that means recording household and home office expenses.
Water, electricity, internet, and heat are just a few line items that may qualify for a home office tax deduction. However, before you get too excited about all the money you might save by writing off part of your home and affiliated expenses, it is important to ensure you follow 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 for the tax years from 2018 - 2025, salaried workers who work from home no longer automatically qualify.
Additionally, your space must meet the following conditions:
- 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 alternative ways to qualify for the home deduction. However, the process does become a little more complicated for regular employees. Traditional employees may seek the deduction if their role fits certain criteria.
According to FlexJobs, the deduction may apply if the employer requires an employee to work from home:
"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."
"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."
1. 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.
2. 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, a new computer, or specific software to run your operation. These deductions can be fully claimed on your tax return.
- Indirect expenses are costs that are necessary 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 payment.
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 probably stock 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. However, this deduction is not meant for outrageous purchases that can’t be proven necessary for your work if you were audited. As an example, 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 the following list is not comprehensive of all 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 about home office deductions triggering IRS audits, tax laws in the 90s reduced the likelihood of that happening. With a good record-keeping system in place, you should be in good standing, even if you end up in less than one percent of taxpayers that receive an audit.
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