With so many people working from home, there’s a lot of talk about the home office deduction. The big question is: are you eligible for it?
See, home-based jobs aren’t all created equal. Some people have a hybrid schedule, others have remote jobs, and some are self-employed. Contrary to popular opinion, not all of these groups qualify for home office deductions.
Want to make the most of your tax write-offs this year? If so, here are the main things you need to know about home-based tax deductions!
Who Is Eligible for the Deduction?
To qualify for the home office deduction, you must be self-employed. That includes freelancers, gig workers, and independent businesses.
If you work for an employer, your office expenses aren’t deductible. This is true even if you only work from home. Due to the 2017 TCJA law, employee-based home deductions won’t be available until 2025.
What Qualifies as a Home Office?
Any type of home can be a home office, as long as you reside in it. That includes single-family homes, apartments, garages, studios, and more.
Here’s the catch: your home office must meet the “regular and exclusive use” requirement. That means you need to use it only for conducting business. If your office is also a playroom for your kids, you can’t get the deduction.
Your home office should also be your principal place of business. That means you must use it for meeting clients, doing bookkeeping, and so on. You can work elsewhere, but you need to do most of your work from home.
Calculating a Home Office Deduction
There are two ways you can calculate your home office deduction. Here’s how they work and how to pick the right one for your freelance taxes.
The Simplified Option
As the name implies, the simplified option is easier to do. The main downside of using it is that it may yield a smaller tax break.
To calculate your expenses this way, deduct $5 per square foot of your home office. The maximum deduction you can get this way is $1,500 for 300 sq. ft. If your office measures, say, 200 sq. ft, your deduction would be $1,000.
The simplified option is great for smaller operations. If your home office makes up a larger part of your home, consider using the standard option.
The Standard Option
This tax prep method revolves around deducting your actual expenses. They come in two forms: direct and indirect expenses.
Direct expenses are clearly connected to your home office. They include internet expenses, renovation expenses, costs of new furniture, and so on. These expenses are 100% deductible.
Indirect expenses are a portion of your overall house expenses. These include mortgage interest, home utilities, insurance, and more. You calculate them based on the percentage of your home you use for business.
If you decide to go with the standard method, you’ll need to fill out Form 8829. Check the instructions if you need help figuring out your expenses.
More on Home Office Deductions
As you can see, the rules for self-employed taxes can be hard to digest. That said, the above guide will help you simplify the process!
Need professional help with calculating your home office deductions? Our team of experienced financial advisors can help you make sense of it all! Contact us here to learn more about our services.