Write off your home work space as a tax deduction
How to Use the Home Office Deduction
If you’re self-employed and work from home, you may qualify for the home office deduction to reduce your taxable income. Here’s a simple guide:
1. Check Eligibility: Your home office must be used exclusively and regularly for business (a specific area, not a shared space like a kitchen table) and be your principal place of business.
2. Choose a Method:
- Simplified Method: Deduct $5 per square foot of your home office, up to 300 sq. ft. (max $1,500). Easy, no detailed records needed.
- Regular Method: Deduct actual expenses (e.g., rent, utilities, internet) based on the percentage of your home used for the office. Requires detailed records.
3. Measure Your Office: Calculate the square footage of your office and divide by your home’s total square footage to find the business-use percentage (e.g., 200 sq. ft. office in a 2,000 sq. ft. home = 10%).
4. Gather Expenses (Regular Method): Track costs like mortgage interest, property taxes, utilities, insurance, and repairs. Apply the business-use percentage to these expenses.
5. File with Form 8829: Report the deduction on IRS Form 8829 if self-employed, and include it on your Schedule C (Form 1040). Most tax software’s will assist you with filing out the form, I personally like to use ProConnect.
6. Keep Records: Save receipts, bills, and measurements to support your deduction in case of an audit.
Tips:
- The space must be used only for business—no personal use.
- If you’re an employee (not self-employed), you generally can’t claim this deduction.
Example on how to implement both methods:
Business: Self-employed graphic designer (files Schedule C).
Home: 2,000 sq. ft. house (owned, not rented).
Home Office: 200 sq. ft. dedicated room used exclusively for business.
Business Use Percentage: 200 ÷ 2,000 = 10%.
Expenses (for regular method):
Mortgage Interest: $12,000/year.
Property Taxes: $3,000/year.
Utilities (electricity, internet, etc.): $4,000/year.
Home Insurance: $1,000/year.
Direct Office Repairs: $500 (e.g., repainting the office).
Home’s Basis for Depreciation: $200,000 (purchase price, excluding land).
1. Simplified Method
Calculation: $5 per square foot, up to 300 sq. ft.
Office size: 200 sq. ft.
Deduction: 200 × $5 = $1,000.
Pros: Simple, no need to track expenses or calculate depreciation.
Cons: Cannot deduct mortgage interest or property taxes separately for the office (though homeowners can still claim these on Schedule A for personal use).
Filing: Enter $1,000 directly on Schedule C, Line 30.
2. Regular (Actual Expense) Method
Step 1: Calculate Business Use Percentage:
200 sq. ft. ÷ 2,000 sq. ft. = 10%.
Step 2: Allocate Indirect Expenses:
Mortgage Interest: 10% × $12,000 = $1,200.
Property Taxes: 10% × $3,000 = $300.
Utilities: 10% × $4,000 = $400.
Home Insurance: 10% × $1,000 = $100.
Total Indirect: $1,200 + $300 + $400 + $100 = $2,000.
Step 3: Add Direct Expenses:
Office repairs: $500 (100% deductible).
Step 4: Calculate Depreciation:
Home’s basis: $200,000.
Business portion: 10% × $200,000 = $20,000.
Depreciation rate (39-year non-residential property): ~2.564% per year (per IRS tables).
Annual depreciation: $20,000 × 0.02564 = ~$513.
Step 5: Total Deduction:
Indirect ($2,000) + Direct ($500) + Depreciation ($513) = $3,013.
Pros: Higher deduction ($3,013 vs. $1,000).
Cons: Requires detailed records; depreciation may trigger recapture taxes upon home sale.
Filing: Complete Form 8829 to report expenses and depreciation, then transfer the total to Schedule C, Line 30.
Comparison
Simplified Method: $1,000 deduction, minimal paperwork.
Regular Method: $3,013 deduction, but requires expense tracking and depreciation calculations.
Best Choice: The regular method saves $2,013 more, assuming the freelancer’s business income exceeds $3,013 (deductions cannot exceed business income, but excess can carry forward).
