The year 2020 witnessed an explosive number of individuals working remotely because of the COVID-19 pandemic. However, most self-employed individuals have long since operated their businesses from the comfort of their homes.
According to the U.S. Census Bureau and the Bureau of Labor Statistics, over 4.7 million people, which makes about 3.4% of the US workforce, were already working remotely before the pandemic.
So, if you are self-employed and primarily work from home, you can apply for a deduction for your home office expenses.
What is a home office deduction?
If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area.
Who is eligible for the home office deduction?
Self-employed individuals or freelancers can deduct their home office expenses from their business income if their office qualifies. This includes people who work from home full time, as well as people who undertake a freelance side gig even if they work for an employer, and people who have been self-employed even just for a few months.
Can I apply for the home office tax deduction?
To be eligible for the home office deduction, you must meet one of the following requirements:
- Exclusive and regular use: You must regularly use part of your home exclusively for conducting business. For example, if you use a spare room to run your business, you can take a home office deduction for that extra room.
- Principal place of business: You must prove that you use your home as your principal place of business. If you conduct business away from your home and use your home regularly, you may qualify for a home office deduction.
Your home office must be either the principal location of your business or a place where you regularly meet with customers or clients. Some exceptions to this rule include daycare and storage facilities.
Note: A home office need not require a designated room in your house, even a small area will suffice. For example, a desk in your bedroom or living room that is only meant for business use shall count as a deductible.
What sort of home office expenses can you write off?
Having a home office allows you to write off a set percentage of all home-related expenses such as rent and utilities. These deductions can prove to be very valuable, sometimes worth up to thousands of dollars, depending on how much you pay for housing.
To calculate your home office deductions, you’ll be required to estimate the size of your office/part of your home or workstation and divide it by the total square footage of your home.
The following list comprises home-related expenses that you can write off:
Rent
A percentage of your monthly rent is tax-deductible for every month you claim a home office expense.
Insurance
You can write off the cost of insurance (home/renter/property insurance) that covers the business part of your home.
Utilities
Basic utilities like electricity, gas, water, and trash removal are usually personal expenses and cannot be written off but you can write off a portion of these costs if you have a home office.
Home essentials
Cleaning supplies, soap, toilet paper, and other necessities are partially tax-deductible.
Home office furniture
Any furniture that you bought for your workstation is fully tax-deductible. You don’t have to take a percentage of these expenses, since they’re used exclusively meant for business activities.
Wi-Fi bill
Internet connection is a necessity, especially if you are working from home. Thus, you can claim your Wi-Fi expenses on your taxes!
Property taxes
Just like the mortgage interest write-off, you can also deduct a portion of your real estate taxes.
Telephone
If you happen to have a landline connection, a portion of it can be written off.
Home repairs and maintenance
Any sort of home office repairs can be written off. However, if you are renovating the home, then you’ll get a partial write-off.
How to claim the home office deduction?
There are generally two major options available for taking the deduction:
- Standard method
- Simplified method
The first method requires you to calculate your actual home office expenses and keep detailed records in the event of an audit. You can apply for the deduction, but you must be prepared to defend your deduction in case of an audit.
The standard method involves requirements that can be complex and burdensome for small business owners.
It is advantageous to have a rough idea of your workspace. With accurate measurements, you may need to submit this particular information to substantiate your deduction, which uses the square footage of your workspace in its calculation.
The latter option significantly reduces the burden of recordkeeping by allowing a qualified taxpayer to multiply an IRS prescribed rate by the allowable square footage of the office in lieu of determining actual expenses. For the simplified option, your home office must not be larger than 300 square feet and you cannot deduct depreciation or home-related itemized deductions.
Which method should I use to calculate my home office deduction?
The simplified method is generally favored since it is less time-consuming. However, due to the $5 per square foot limitations set within the simplified option, the maximum you’ll be able to deduct from 300 square feet is $1,500.
If you wish to claim the largest home office deduction you’re entitled to, you’ll have to calculate the deduction using both the standard and simplified methods. If you choose the former method, calculate the deduction using IRS form 8829.
What’s more, you don’t have to use the same method every year. The simplified option is said to be easier but may result in a smaller tax break while the standard option requires more complicated calculations and recordkeeping, but can provide you with a larger deduction.
The home office deduction is a bit complicated although very beneficial. Flyfin can help you make things easier. The A.I. scans your expenses and automatically finds deductions. You just have to answer a few questions and get an accurate quarterly tax amount within 5 minutes with zero effort.
The app allows you to track expenses and income on an “ongoing” basis, and thus makes the computation of taxes very easy and accurate. Also, you can contact the expert team of CPAs to help you determine if you qualify for home office deduction and how much you can write off.
