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FREELANCE KNOWLEDGE TAX HACKS

Commonly Missed Tax Deductible Expenses For Your Home Office6 min read

December 24, 2018
KATIE PERRY

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Commonly Missed Tax Deductible Expenses For Your Home Office6 min read

There’s no place like home. It’s your sanctuary; it’s your shelter; it’s your place to dream in peace.

Your home is where you live, love and most recently, where you work.

As the full-time independent workforce continues to steadily increase, so too has it become just as common to refer to a certain amount of space within your house as your home office.

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Traditionally, it is understood that the portion of your home used specifically and exclusively for workspace is tax deductible.

Yet, there are many more deductions that you may very much qualify for but are not familiar with just yet.

Luckily you have stumbled upon this article, which will help you discover those less common deductions related to your home office.

Work from home tax deductions

We’ll get into explaining exactly which expenses you can deduct if you work from home. But first, let’s define some basic ground rules.
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Fundamentally, if you can prove that your home office is essential to your business and you spend a substantial amount of time there, then you are on track for a tax deduction.

The home office exclusive use rule for tax-deductible expenses:

What qualifies a space as a home office?

In order to qualify as a home office, your home has to either be your principal place of business or it’s where you see clients, customers, or patients.

Going forward, this definition will be referred to as the exclusive rule as it clearly outlines that your home office space must be exclusive to your business.

Related: 7 Commonly Missed and Miscategorized Freelance Tax Deductions

The exception to the exclusive rule:

As with any rule, there are accompanying exceptions. And that is certainly the case here with the exclusive rule.

Below is a list of instances that also allow you to claim your home office as a tax-deductible expense.

1. It’s the only location of your business

There may be a room in your home that is your TV room and also the room where you store products, goods, and frankly any items that you make and sell.

If this storage room is the only location of your business, then this room qualifies as your home office even if you also watch TV in that same space.

2. You do your billing and other office work from there 

You qualify for a home office deduction if you do your billing and other office work from your office but spend most of your time elsewhere due to the nature of your work.

Fundamentally, if you can prove that your home office is essential to your business and you spend a substantial amount of time there, then you are on track for a tax deduction.

3. Your employer requires you to work from home

As long as you don’t charge your employer rent, you can also qualify for the deduction if your employer requires you to work from home.

If your arrangement to work for home has been given to you out of convenience for you, then it is NOT eligible for tax deduction.

4. You converted a separate structure on your property into an office

If you’ve converted a detached garage to an office or studio, then these separate structures on your property qualify for a deduction. These separate structures do not have to be a part of your main place of business to qualify.

More: Our Number 1 Piece of Advice for First Time Self-Employed Taxpayers

“Direct” expenses for working from home

Now within this business part of your home, you may qualify for several “direct” expenses that are 100% tax deductible given, again, that they are used specifically in your office and for your office only.

Here’s a brief list of direct expense examples:

  1. Hiring someone to paint your home office
  2. Buying a computer for your work
  3. Office supplies i.e. printer, file cabinets, etc.

The direct expenses related to your home office are clearly elements of your business that directly impact your success.

TIP: Thoroughly document these expenses by retaining all relevant receipts and tracking your annual expenses.

AND CO automates keeping track of your expenses, files them and get the reports you need for tax time. Find out more here.

“Indirect” home office expenses

Not all related home office expenses are referred to as direct. As you may have guessed, the other category is indirect expenses.

Check out the following list for examples of these indirect expenses:

  • Mortgage interest
  • Real estate taxes
  • Utilities (heating, cooling, lighting, water)
  • Home repairs and maintenance (so long as they benefit both the business and personal parts of the home)
  • Homeowners insurance premiums
  • Home alarm systems
  • Landscaping (if your home office is used to meet with patients, clients, and customers)
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These deductions can be calculated simply by multiplying each expense by your home office percentage. If your home office is 250 sq. ft. and your home is 2,500 sq. ft., your office takes up 10% of your home.

And for example, if you spend $200 a month on electricity, and your home office takes up 10% of your home, then you would be able to expense $20/mo for electricity as a home office expense. In total, you’d deduct $240 for the tax year to account for your electricity.  

And that’s just one of the many additional tax deductions for your home office. 

TIP: Your total freelance tax deductions for your home office cannot exceed the amount of money that you generate from your home office business.

Home office depreciation calculations

While repairs to your home are absolutely eligible for tax deduction and can be calculated just as described, renovations must be calculated according to depreciation.

Depreciation is based on the idea that everything wears out eventually, even a home. In order to properly find your home office depreciation, you would calculate the tax basis of your home in its entirety.

Follow these steps:

  1. Take the cost of improvements and add them to the purchase price of your home.
  2. Then subtract the value of the land that your home is located on.
  3. Following, multiply this number by your home office percentage. This number is your tax basis for your home office.
  4. Lastly, take your newly calculated tax basis for your home office and divide it by 39. (Depreciation deductions are figured over a 39-year period for home offices.)

Know your home office tax deductions

Your home office is where you build your business and strive for success. It only makes sense that you know the rules on how the money you’re investing in that space could be saved.

Home office deductions – from the exceptions to the rule to the nitty-gritty of depreciation of home renovations – should now be demystified.

And if you do find yourself unsure about whether or not your home office expenses qualify as freelance tax deductions, then chat with your Chief Operator at AND CO – they answer these questions each and every day. 

KATIE PERRY

Katie Perry is former Editor at AND CO.

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