When You Can and Can’t Write Off Home Office Expenses
Tax season is here and many remote workers are wondering what expenses they can write off while working from home. In 2021, 4.5 million people left their jobs as part of what news outlets are calling “The Great Resignation.” Some of those who quit traded a 9-to-5 for becoming their own boss through freelancing out of a home office. Now that it’s tax time, those who are self-employed are crunching the numbers to see how much of their expenses can be written off. What qualifies might surprise you — take a look.
Standard Home Office Deduction
There’s actually a deduction built into tax law that you can take if you have a home office that simplifies the process. Instead of calculating each expense it takes to run your office, you can go by an easy calculation. The way the deduction is calculated is by taking $5 per square foot of your home office up to 300 square feet, for a $1,500 maximum deduction
To qualify for this deduction, you have to be self-employed, a gig worker or an independent contractor. So, you can’t take this deduction if you work remotely full time for a company and receive a W-2. You also need to use some part of your home exclusively for your business, meaning if you work from the kitchen table, you can’t take this deduction. The space has to be somewhere that you only use for work purposes, and it has to be where you do the majority of your work from. Maybe that means the place where you make your product or a desk where you do all of your freelance writing.
Ask yourself if you use the space when you’re not working for nonwork purposes. If the answer is yes, this deduction does not apply to you. The good news is you don’t have to own your home to take advantage of this deduction, so even if you rent a small apartment, if you have a work space, you can take this deduction.
Mortgage Interest, Rent and Utilities
If you don’t take the standard home office deduction, you can break down certain home expenses and deduct those. This is known by names, but the IRS calls it “The Regular Method.” How you determine this is based on the square footage you calculated for your home office.
Divide the square footage of your office space by the full square footage of your home and you’ll get a percentage. That’s how much of your total utilities and your rent or mortgage interest you can deduct for your business. So, if your home office is 20% of your living space’s total square footage, you can deduct 20% of your total rent or mortgage interest for the year plus 20% of the total utilities for the year.
Home and Renters’ Insurance
A portion of the insurance you pay can be deducted as well. Take the same percentage you used above and deduct that much of your homeowners’ or renters’ insurance if you’re not taking the standard deduction.
If the part of your home that you exclusively use for your business undergoes any repairs, you can deduct the cost of them if you’re not taking the standard deduction. If your entire home needs a repair during the year (like a heating or air conditioning unit) refer to the square footage percentage you calculated above and deduct that amount of the total home repair.
Using the Regular Method as a homeowner, you have to depreciate the value of your home. This means that when you sell your home, you’ll have to pay capital gains on the percentage of the home used for your office. However, depreciation does give you a reduction in your taxes in the time being.
You can also depreciate equipment you use for your home business. You can choose between deducting the full cost of the item the year you buy it, or splitting the cost up over several years. Items that are eligible for this are things like computers, software, electronics that are exclusively used for your business (like cameras for photographers), furniture and other big-dollar items.
Watch Your Profits vs. Deductions
One thing to watch out for when you’re calculating deductions is how much profit your business brought in. The IRS will not let you write off more than you profited.
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