Thanks to modern technology, more jobs than ever can now be performed remotely, which means an increasing amount of workers don’t even need to leave their homes to get the job done.
Add in the fact that the coronavirus pandemic has forced millions to adapt and learn how to work from home, at least temporarily, which means many who are new to the game are trying to navigate the ins and outs of home office setups, work-life balance, and of course, tax season.
If you have a home office—or at least a clearly designated space where you do most of your work—and you’re not a full-time employee (but rather a contractor or self-employed), you could qualify for a home office tax deduction.
However, there are a few important requirements you’ll have to meet first. Read on for more on home office deductions and how to determine whether or not you qualify.
What Is a Home Office Deduction?
A tax deduction lowers a person’s tax liability by lowering their taxable income. For many individuals who work from home, the costs associated with maintaining a home office can be deducted from their total taxable income.
Some of these associated costs might include percentages of your home’s:
- Internet fees
- Electricity bill
- Mortgage interest
Can I Deduct My Home Office If I Work From Home?
There are several requirements that you must meet in order to qualify for a home office deduction.
First, you cannot be an employee. This deduction is primarily reserved for self-employed individuals and contractors who work from home, rather than an employer’s office.
If you’ve been mandated to work from home as part of the social distancing measures associated with the COVID-19 pandemic of 2020, you might consider talking with your employer about converting from an employee to a contractor in order to take advantage of this deduction and other benefits.
Second, you must also be either a homeowner or renter. Note that “home” could refer to a single-family home, apartment, condo, duplex, or houseboat, and the IRS states that the expenses for free-standing structures (such as a studio, garage, or barn where you do your work) also qualify.
Hotel rooms and other temporary lodgings, however, do not qualify.
If you meet these first two requirements, there are two more very important qualifications outlined by the IRS that your space must meet.
Regular and Exclusive Use
For your home office to qualify as a deduction, the IRS mandates that you must “regularly use part of your home exclusively for conducting business.”
So, if you have a spare bedroom in your home that you use as an office, that could qualify.
If you use that spare bedroom to work, but also to host guests (even a few days a year), or use it as a space for your children to play, then the space is disqualified.
This doesn’t necessarily mean, though, that you need a separate room for your home office. You could, for example, section off part of your basement—perhaps with a partition—as long as you’re able to demonstrate that personal activities are excluded from your designated workspace.
Even allowing your children to play or do their homework while you’re not working would violate the “exclusive use” requirement.
Principal Place of Business
Next, you must be able to show that your home office is your “principal place of business.”
This means that your home office is the place where you regularly carry out administrative or management activities, keep records, set appointments, or bill customers.
However, this doesn’t mean that all of your business-related duties and activities must take place in your office. For example, you can still meet with clients in other locations, or carry out some of your other tasks elsewhere.
Note that even if you work full-time as an employee for a company but work part-time on your own business based in your home, you can still pass the “principal place of business” test, even if you spend more time at your other job.
How Much Can You Write Off for a Home Office?
To calculate your home office deduction, there are two methods you can use.
Actual Expense Method
The actual expense method provides the most precise and exact results, though it involves quite a bit more work.
This method allows you to deduct direct expenses (such as repairs to your home office) in full, and indirect expenses (like insurance or utilities) based on the percentage of your home that is used for business.
First, you’ll need to measure the square footage of your home office, or whatever space you’ve dedicated as your workspace and which meets the requirements outlined above.
For example:If your home office measures 200 square feet and your entire home measures 2,000 square feet, your business percentage would be 10%.
This means that you can deduct the cost of 10% of your:
- Utility bills
- Homeowners insurance
- HOA fees
- General repairs/maintenance
The simplified method became available to tax filers beginning with 2013 returns. For 2019, filers can use the following formula:
$5 x number of square feet in your home office (with a maximum of 300 square feet)
So, if your home office measures 200 square feet, your deduction would be $5 x 200 = $1,000.
For freelancers and self-employed individuals especially, keeping meticulous records is one of the biggest favors you can do yourself when it comes to filing and paying your taxes.
Check out these expense tracking tips for freelancers to ensure that you stay organized and on track throughout the year, so you can minimize the panic and headaches you’ll experience come April.
What Else Can You Write Off Working from Home?
Your home office is not the only thing you can write off as someone who works from home and is self-employed.
For a list of more expenses that writers and many self-employed workers may qualify for, check out these 20 smart tax deductions for writers.
However, as we’re not tax professionals, please use the information here for informational purposes only; for tax, legal, or accounting advice, seek the help of a professional advisor to get the best guidance for your unique situation.
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