Updated October 4, 2019. If you ask any freelancer what their favorite perk is, you’d probably get a lot of different answers.
But a popular one would be the ability to work from home. Nothing like contributing to society while in your sweatpants, right? Or maybe you go for the suit and tie look, or take it casual with jeans and a t-shirt. It doesn’t matter, because as another freelancer perk, you’re your own boss!
If you do work from home, you should know that the benefits don’t stop at an extremely short commute. You can claim tax deductions on your home office to lower your bill to Uncle Sam.
But what’s eligible to be claimed? What’s off limits? How do you separate the "home" from the "office" to make sure you’re claiming the correct expenses? Use these tricks to figure out what you can claim – and how – to save yourself a lot of money in the long run.
What is a home office?
This is one of those questions that seems silly and obvious until you actually have to define it. For better or worse, the federal government has defined it for you, and it’s important to know what they consider a home office before you go trying to make claims.
First, your workspace has to be exclusively used for business. That doesn’t mean the entire place – you’re still allowed to, y’know, live in your house – but there has to be an area or room that is used only for your business.
This exclusive area also has to be used regularly. Pretty self-explanatory, but you have to do most of your work there and not just perform occasional busywork while a majority of your job takes place elsewhere.
Those are the main qualifiers for making home office deductions – if you aren’t using it as your principal place of business, you’re out of luck – but there are some other things to consider, like whether it’s a separate structure or if you meet clients there. The IRS has been kind enough to make a boring-but-practical flowchart to find out whether or not you can deduct home expenses.
So your home office qualifies for a deduction. Congrats! Now you get to decide if you want to do things the easy way or the hard way.
Breaking down the actual costs of a home office can be complicated, so the IRS implemented the appropriately-named Simplified Method. All you have to do is multiply the square footage of your home office (up to 300 square feet) by $5.
It can’t be that easy, though. There has to be a catch, right?
Well, the caveat to using the Simplified Method is that you can deduct $1,500 at the most. The more complicated method involves a Schedule C form and figuring out the expenses of your home and deducting the business-related costs. It requires a good deal more number crunching, and includes the additional costs of depreciation, insurance, repairs, security systems, and utilities and services. There’s more work involved but you’ll likely end up netting a larger deduction if you take the time to make all of the appropriate claims.
For example, if your house is 2,000 square feet and your home office is 200 square feet, you’re going to be using 10% as your base for your deductions. The IRS says that typically "the business percentage for utilities is the same as the percentage of your home used for business," so in this scenario you’ll be using 10% as the base for your utility deductions as well. If your total home costs end up being $20,000, you’ll be able to deduct $2,000 for your home office use – more than the maximum $1,500 from the Simplified Method, but also requiring you to keep up with your expenses.
Utilities and services
Eligible utilities and services include electricity, gas, trash removal, and cleaning services.
Telephone charges are a little tricker. Your regular phone service can’t be deducted, but long-distance charges can be. Also, if you install a second line specifically for business purposes, you can deduct that as well.
Just because your office is in your home doesn’t mean it can’t look like a workplace. Desks, chairs, tables, lamps, and even decor can be deducted – as long as you’re only using it in your office.
A home office isn’t of much use of you don’t have the right tools to do your job. Even though they aren’t technically part of your office, supplies like paper, ink, staples, and even postage can be deducted.
There are a lot of opportunities to claim home office deductions, as long as you’re doing it the right way. The last thing you want to do is purposely (or even accidentally) claim something that you didn’t actually use for business purposes.
If you don’t feel comfortable looking over tax forms or have questions about whether something qualifies as a home office deduction, a tax professional is a worthwhile investment. You’ll be able to make sure you’re not paying more than you should, and the IRS won’t come knocking later!