With the prevalence of remote and hybrid work schedules, and the rise of hustle culture, much of the workforce in the United States has taken on freelance or gig work to supplement their primary source of income. Those who work from a home office may be eligible for a home office tax deduction. Here’s what you need to know about home office tax deductions and how to check your eligibility.
What is the home office tax deduction?
A home office tax deduction is a deduction that eligible workers can take if they have a dedicated in-home office space, which is strictly used for business.
In tax year 2013, the IRS introduced a simplified option to calculate the deduction for home offices, as opposed to the more in-depth regular method. With the simplified method, taxpayers receive a deduction of $5 per square foot used for the home business, with a maximum of 300 square feet. Additionally, with the simplified option, workers can claim in full all home-related itemized deductions on Schedule A. However, there is no home depreciation deduction available for the years the simplified option is used.
Using the regular method, however, could lead to more considerable tax savings because you can deduct the depreciation of your home. When calculating a home office tax deduction via the regular method, workers need to calculate their home expenses, including utilities, and then multiply that sum by the percentage of their home dedicated as office space.
If you’re unsure which deduction method will yield you the highest tax deduction, try both calculations to find out. It is also wise to consult with a tax professional for advice.
Who is eligible for the deduction?
While more people have been working from home, not everybody can take advantage of the home office tax deduction. This tax break is for those who are self-employed, freelancers, independent contractors, or gig workers.
Due to the Tax Cuts and Jobs Act of 2017, remote employees who work for an employer in W-2 positions are no longer eligible for the tax break. However, if you worked for an employer but also had a freelance side job or were temporarily self-employed, you can claim the deduction during the months you worked in those positions, although you must have some Schedule C income to be eligible.
[Read more: 4 Things Gig Workers Need to Know About Paying Taxes]
Even if you were only self-employed for a few months out of the year, you can still claim a partial home office tax deduction.
How do you calculate the deduction?
A home office deduction can either be calculated using the regular or simplified option. The regular method requires calculations using IRS Form 8829, Expenses for Business Use of Your Home, to deduct your home office expenses.
With the simplified option, your home office square footage is multiplied by a predetermined rate set by the IRS. While the simplified option may be easier, you could be losing out on some additional deductions by not using the regular method. However, the regular method requires more in-depth work, including calculating all your actual expenses and keeping a record of all receipts.
For both methods, the home office deduction can only be used if the portion of the residence is used exclusively and consistently for business purposes, the size of which determines your “business-use percentage.”
To calculate the business-use percentage of your home, measure the square footage you dedicate to your home office and compare that to the total area of your home. For example, if you rent an 800-square-foot studio apartment and 100 square feet of your home is dedicated to your home office, your business-use percentage is 12.5% (100/800 = 12.5%).
There are a few exceptions to this rule, such as if you run a daycare in your home. Because that space is available for personal use outside of your hours of operation, you must reduce your business-use percentage by totaling the number of business hours per year. So, if you use 30% of your home for your daycare business and you work nine hours per day, five days per week for 51 weeks of the year:
- 9 x 5 days x 51 weeks = 2,295 hours per year
- 2,295 x 8,760 total hours annually = 0.26 (26%) of available hours
- 26% of available hours x 30% of home used for business = 7.8% business write-off percentage
What qualifies as an eligible home office?
Workers can qualify for the home office tax deduction regardless of what their office space looks like as long as it meets one of these two requirements:
- The space is regularly and exclusively used for business. Regular and exclusive use means you’ve dedicated an area in your home for running your business.
- The space functions as your principal place of business. To claim your home office as a primary place of business, you must show that you use your home to conduct the majority of your business.
What other expenses are deductible?
Various purchases for a home office can be deducted if they are listed as business expenses on Schedule C. Some examples of home office expenses that may be deductible include:
- Printers, scanners, and additional computer monitors.
- Office furniture, such as desks, chairs, and storage solutions.
- Internet modems and other connectivity equipment.
- Video call accessories, including ring lights, headsets/microphones, and laptop stands.
- General stationery needs, such as printer paper, notebooks, writing implements, and shipping materials.
Keep track of all your business expenses and receipts to ensure you can prove your purchases in case of an audit.
[Read more: A Complete Guide To Filing Your Business Taxes]
What is the process for taking the deduction?
Filers have different options for taking their deduction, depending on the method used to calculate it. Those who use the simplified method will take the deduction directly on Schedule C when reporting the income and expenses for their business. However, those who calculate deductions using the regular method will submit a Form 8829 with their tax return. Afterward, they will report the total deduction from the business income on Schedule C.
If your home office expenses are more than your business income for the year, your deduction will be limited, as your Schedule C income cannot go below zero using business use of home office expenses.
Can you claim the deduction after only a few months of being self-employed?
Even if you were only self-employed for a few months out of the year, you can still claim a partial home office tax deduction. Be sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.
If an eligible taxpayer decides to use the simplified deduction method, they can use the number of months they worked from home to prorate the amount they can deduct. They can also choose to deduct a portion of actual expenses for the months they were eligible for the deduction.
[Read more: Working as an Independent Contractor? These Resources Will Help You Manage Your Taxes]
Will a home office tax deduction trigger an audit?
Some self-employed workers may be concerned that filing for a home office tax deduction could trigger an audit. However, a home office deduction is a viable, legitimate deduction that the IRS has granted since 1959.
Many of these concerns stem from the Tax Reform Act of 1976, which introduced Section 280A to allow taxpayers to deduct their utilities, home depreciation, and home insurance on a prorated basis. Since then, there have been several changes to IRS requirements and Supreme Court decisions regarding how to apply Section 280A.
One of the biggest driving forces behind the concern around home office tax deductions is the Discriminant Inventory Function (DIF), the IRS’s fraud prevention system. The DIF searches for oddities on tax returns and compares them to other taxpayers’ returns with similar tax profiles. The other is the IRS Fraud Enforcement Office, which investigates fraud-related incidents.
Filing for a home office tax deduction alone won’t trigger an audit. However, depending on your situation, it could be a red flag, which is why it is important that you don’t claim too much of your home as your workspace. To minimize the chances of a home office tax deduction triggering an audit, be sure you qualify for the deduction, accurately track your expenses, and maintain orderly receipts and records.
This story was originally written by Miranda Fraraccio.
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