If you’re one of the 16 million self-employed people in the US, there is a good chance that you find your taxes perplexing. After all, the rules prove different for the self-employed. For example, you must file taxes if you make more than $400 in a year.
Things get even more complicated if you work from a home office. Did you know that you can take tax deductions for home office expenses? Do you know what things you can deduct?
If you didn’t know you could take deductions or what things you could deduct, you’re in the same position as many home office workers. Keep reading for a breakdown of the essential home office tax deductions.
Qualifications
Before jumping into specific deductions, you need some background on qualifying a home office for deductions. The IRS sets out a couple of fairly specific rules about which home offices make the cut.
The first rule they set out is that you must use your office space specifically and exclusively for your business. So, let’s say that you do some freelancing as a writer. You must use your office only for writing and writing business-related tasks, like invoicing, or it doesn’t qualify.
In other words, you can’t take a laptop into your kids’ playroom and call it an office.
The other key qualification is that your office serves as your primary business space. In other words, you must conduct most of your business from that home office space most of the time.
If you spend five months a year sitting on a beach that’s 1000 miles from home, working from a laptop, you can’t really deduct a home office.
Standard vs Simplified
The IRS also provides two options for calculating your deduction: standard and simplified.
The standard method calls for extensive and meticulous record-keeping. With the standard method, you make calculations based on the percentage of your home that the office occupies.
This approach lets you deduct direct and indirect expenses. Direct expenses include things like putting in new flooring in your home office or building an addition to serve as a home office. Indirect expenses include things like insurance, mortgage interest, utilities, and internet service.
So, let’s say you paid out $9000 in indirect expenses. Let’s also say that your home office takes up 10% of your home. You can take a $900 deduction for indirect expenses, along with whatever you paid for the new flooring in your office.
The simplified method lives up to its name.
You multiply the size of your home office space by $5. The IRS uses a hard cap of 300 square feet on the deductible space. Then, subtract business expenses from gross business income.
Assuming you made a profit, you can claim whichever number proves smaller.
The Physical Space
In either method, the main deduction comes from the physical space itself. The prevailing wisdom here is that you pay a certain cost for sacrificing home space for business space.
The simplified version just lets you calculate based on the raw footage and compare it with gross profit. The standard version involves more complex calculations based on the total percentage of space.
If you plan on using the standard version, it pays if you give yourself a very large office. If you plan on using the simplified version, don’t go over 300 square feet unless you just really want a huge office.
Just remember that you cannot use the office space for anything not business-related.
Direct Expenses
Your direct expenses for the business office include most work done to create, maintain, or upgrade your office space. For example, you may have carpet installed or the walls painted to give it a more professional air.
You may also deduct expenses such as running a dedicated phone line or installing a dedicated internet connection for the office.
If you build a space for your home office, such as a freestanding building or an addition, you can typically deduct at least some of those costs. If you’re not confident about what is or is not deductible, consult a tax or accounting professional.
The IRS may impose deduction limits on direct costs associated with building a home office space.
Indirect Expenses
If you opt for the standard approach, the indirect expenses can prove quite extensive. For most home office workers, however, the biggest benefits come from the following areas:
- Mortgage interest
- Mortgage insurance
- Rent
- Utilities
- Real Estate Taxes
These expenses generally represent a huge portion of any household’s ongoing expenses. While you can only deduct a portion of them, the total amount of the deduction adds up when calculated across a full year.
You may also deduct a portion of the expenses related to repairs that specifically affect the office. For example, let’s say that you need electrical work done to restore power to the office. That expense directly relates to the office.
On the other hand, plumbing repairs typically don’t apply to the office. So, you can’t deduct a portion of that expense.
Parting Thoughts on Tax Deductions for Home Office Workers
Tax deductions for home office workers can end up a relatively simple or very complex affair. If you don’t make a lot of money from your business or live in a small space, the simplified version is probably your best bet.
If you make a substantial income from your home office and live in a spacious home, the hassle of the standard approach often pays off. Since the math and deductions are complex, however, you may find it prudent to use a tax professional.
Want a deduction for home office expenses but don’t feel confident about the rules or math? Gary M. Kaplan, C.P.A., P.A. specializes in both individual and business tax preparation. Contact us today for a tax help.
