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. 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 be very much qualify for but are not familiar with just yet. Luckily you have stumbled upon this article as it will discuss those lesser common deductions related to your home office!
The exclusive rule for tax deductible expenses:
First, let’s properly define what qualifies a space as a home office. In order to qualify as a home office, it has to either be your principal place of business or it is 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.
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!
- 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.
- 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.
- 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.
- 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.
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:
- Hiring someone to paint your home office
- Buying a computer for your work
- 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!
“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)
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 of electricity, and your home office take 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.
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:
- Take the cost of improvements and add it to the purchase price of your home
- Then subtract the value of the land that your home is located on
- Following, multiply this number by your home office percentage. This number is your tax basis for your home office.
- 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.)
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 into 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 a Chief Operator at AND CO – they answer these questions each and every day. No need to read another article, just text your CO 🙂