As the Covid-19 pandemic self employed tax deductions offices and workspaces around the country, many American workers had to adapt to doing their jobs or running their businesses from home. Of course, home offices are not a new concept, and the IRS has had a framework in place for granting work from home tax deductions for home offices for decades. However, there’s a big difference between “working from home” and owning a home office. If you want to write off your home workspace you’ve been using for the past 18 months, or want to transition to a legally defined home office full-time, there are some qualifiers you should know before you file.
What is the Home Office Deduction?
The Home Office Tax Deduction allows business owners who use a portion of their homes primarily as a place of work to subtract certain business expenses from their year-end taxes. The deduction applies to free-standing homes, apartments, and condos in equal measure. It is a useful deduction for people who are self-employed or own their business as it draws a distinct boundary between home and business expenses. However, there are a few qualifications that must be met for a “home office” to be legitimate from the IRS’ point of view:
-A home office must see “regular and exclusive use.” This means that the area you’ve established for your home office must be used as your regular place of business and is used as such frequently. Your home office must also be used exclusively for work, and a space that doubles as an office as well as a den, game room, bedroom, etc. will not be considered a home office for tax reasons.
-Your home office must also be considered “the principal place of your business.” This means that you must be able to demonstrate that you conduct the bulk of your business at home, such as seeing clients, creating products, and/or performing clerical work. Free standing structures that are integral to your business like barns, garages, or studios can also qualify for self-employed tax deductions but a business owner needs to demonstrate principal use in this case as well. An office that is supplementary or merely “convenient” cannot qualify for a deduction.
The Home Office Tax Deduction can be claimed by property owners and renters alike, but it must apply to a permanent residence—hotels and Air BnB’s won’t qualify. Unfortunately, with many workers sent home by the pandemic, many impromptu workspaces may not fully qualify for a Home Office deduction as the space still doubles as other living spaces. However, the full text describing the qualities of a home office is called Publication 587 and is available on the IRS website. If you own your own business and were forced to work at home during the pandemic, it’s worth it to discuss these qualifications with your tax preparation services—you may have unknowingly qualified for this deduction already.
Who Can Claim the Home Office Tax Deduction?
Unfortunately, the 2017 Tax Cuts and Jobs Act disqualified employees of another company from receiving the Home Office Tax Deduction, and it is currently only available to a person who is self-employed or owns their own business. This may disqualify many workers who were required to work from home during the pandemic by the company they work for. However, for those who are self-employed, you can still claim the deduction even if you were only self-employed for part of the year or were otherwise employed in a part time or full time capacity. This means that freelancers or people who own a business to supplement other income can take full advantage of the home office and potentially other self employed tax deductions.
How Will Having a Home Office Affect My Taxes?
Once you’ve established that you qualify for a deduction, there are a couple different ways for your business services provider to file. Typically, the deduction is calculated based on the square footage of your home compared to the size of your home office. The two ways to account for this are the actual expense method and the simplified method.
- The actual expense method is more complicated, but provides a better overall look at your expenses and gives you the exact amount for your deduction. It is calculated based on the percentage of your home used for business. For example, if you have a 100 square foot office in your 1,000 square foot apartment, you can deduct 10% of your indirect home expenses like mortgage interest, utilities, or insurance—as well as 100% percent of your direct business expenses like office supplies, furniture, or maintenance. The actual expense method requires detailed record keeping, and any and all financial records related to your business should be filed and stored.
- The simplified method is, as it suggests, a simple way to deduct a qualified home office based on a flat rate and multiplier that doesn’t require any record keeping. A business owner can deduct $5 per square foot of their home office, with a maximum of 300 square feet or $1,500. The simplified method is handy and can be useful for people with limited experience with record keeping or minimal office expenses, but the overall deduction will usually be less than what the actual method can provide.
If you qualify for a home office tax deduction, ask your bookkeeping service which method will net you the greatest deduction before you start filing small business taxes. Working from home doesn’t just have to be a public safety measure, and many small business owners can benefit greatly by making the space they already own work for them by setting up a legally defined home office.