For employees that work from home, your at-home expense deduction have been reduced. However, for self-employed workers that work out of their home, deductions still remain.
To claim a home office as a business expense, you must use part of your home as your principal place of business or a place where you regularly meet clients or customers or store inventory. If your home office is a separate structure then it does not have to be your principal place of business.
For deducting home office space on your tax return, the IRS requires these expenses to be used exclusively for your self-employed business.
Deducting Home Office Expenses
If you worked as an employee during the tax year, you can’t typically claim home office expenses related to your work. However, if you worked for yourself in some capacity, you might be able to deduct home office expenses.
If your home office is used exclusively and regularly for your self-employment, you may be able to deduct a portion of your home-related expenses, such as mortgage interest, property taxes, homeowner’s insurance, and utilities. You do not have to meet the exclusive use test if you claim the deduction for using your home as a daycare facility.
When eligible to claim the home office deduction on your taxes, you have two ways of claiming the deduction, the:
- Simplified method: You can use this method to determine your home office deduction on your return by expensing $5 per square foot of your office, up to 300 square feet for a maximum of $1,500.
- Direct method: This involves tracking all of your home office expenses in addition to any costs related to repairing and maintaining the space. Further, you can claim deductions for a portion of other expenses based on the proportion of the space to the rest of your residence. There is no maximum deduction limit, making it more attractive in some instances than the simplified method. To account for depreciation of a portion of the house if you own it.
To get the biggest deduction possible, you may need to calculate your deduction using both the direct and simplified methods to see which one comes out ahead for your taxes. You don’t need any reason to switch from one method to the other year-to-year.
Keep Good Records
To avoid tax penalties, keep detailed records of your expenses in case you are audited. Also, save proof of payment for any tax-related expenditures. This proof may be in the form of a credit card or bank statement, canceled check, or itemized receipt. If you paid in cash, the receipt should include the payee’s name, the date of the payment, and the amount. Digital records will usually satisfy this requirement as long as you can retrieve them when needed.
Calculating the Deduction
Divide the square footage of your home office by the square footage of your entire living space to calculate the percentage of your home that is dedicated to your home office. This percentage is then applied to your home expenses to determine what amount might be a business expense.
You can claim a percentage of expenses such as rent, mortgage interest, utilities, insurance, and repairs. Depreciation is also an allowable expense for a home that you own.
For example, if your office is 250 square feet and your home is 1,000 square feet, you’d deduct 25% of your allowable expenses (250/1,000 = 0.25). If you had $10,000 in eligible home-related expenses, you could claim up to $2,500 in deductions.
Can I claim a deduction for my side gig?
If you use your home office for your W-2 job and your side gigs, you won’t be able to claim your home office as a tax deduction.
This is a confusing tax deduction to take, so work with a licensed and experienced tax professional like me to help you maximize your tax deductions.
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