You work from home. That means you automatically qualify for a home office deduction when tax time rolls around, right? Not so fast.
“The dumb joke with freelancer taxes is that the answer is always, ‘it depends,’” says Brass Taxes founder Rus Garofalo. Some self-employed workers qualify to deduct up to $1,500 on their taxes, so it’s worth investigating.
The Internal Revenue Service has specific rules on what sort of set-up qualifies. The big one: You can’t use your home office for non-business activities, which is a big ask for many solopreneurs, especially in space-starved spots like New York City. According to Garofalo, a home office isn’t a fluid concept where you can say, “I use the dining room table from 9 to 5.” If you’re working from a multi-purpose space – like a living room couch, or a desk in your room that also serves as your main dining area – then it’s not exclusively used for business. (The only exception to this rule is for daycare providers.) There are no stipulations, however, about the actual structure of your home office. You could work from a walk-in closet, your basement, a garage, or a barn.
No matter where you work, the IRS wants to see a clear delineation between where your office is and the rest of your life. Still not sure if your home office counts? Describe it to your accountant. If you do choose to claim an area like a desk in your room, be prepared to answer questions from the IRS about its use. If they ask for proof, Garofalo says, “You can submit a floor plan and photos. You want to show that this space is exclusively used for work, and it's not also the kitchen table or the coat closet.” If you have a home office that meets the IRS requirements, you should definitely deduct it. Some freelancers worry this could raise a “red flag” that triggers an IRS audit, but Garofalo says it isn’t that simple: “No one knows what the 'red flags' are, otherwise we would all just dance around them. If you have a home office, you should take it.”
There are two ways to do it: the simplified option and the regular method. (Or, the easy way vs. the complicated-as-hell way.) In the simplified method, you calculate the value of your home office simply by multiplying $5 for every square foot, for a maximum deduction of $1,500. For the regular method, you’ll account for things like depreciation, and even the IRS admits that these calculations and recordkeeping requirements are too burdensome for the average small business owner. Your accountant will be able to advise if the regular method is worth your time. Garofalo says that in a high-rent area like New York City, “We don't recommend the simplified method for the home office. It's always going to be a better deal to take your actual costs.”
As with all aspects of your taxes, there simply isn’t a one-size-fits-all answer: A homeowner might choose not to use the regular method to calculate their home office deduction since it affects their capital gains tax; when you sell your home, your home office might increase the amount of tax you have to pay on your profit from the sale. If you’re contemplating trying to deduct a tiny, perhaps not totally exclusive space, keep in mind that it might not be worth the gamble since the amount you would deduct for a desk probably wouldn’t be enough to “move the needle” when it comes to your taxable income, says Jonathan Medows, CPA. Using the simplified option to calculate the home office deduction, a desk that measures 7 square feet would only amount to a deduction of $35.
You have to qualify for a home office deduction to deduct a portion of your utilities. Simply figure out the square footage of your office, and then calculate what percentage it is of your entire home. Then deduct that same percentage of your gas and electric bill.
Phone and internet aren’t technically utilities, and deducting their cost is more complicated. Enrolled agent Jackie Folk has clients who highlight every single phone call on their phone bill, while others prefer to have phones that are for business only. If you use your phone a lot for work, you might want to simplify your expenses and get a separate line (or separate mobile phone, since no one uses landlines anymore) just for business calls. Many taxpayers choose to simply do a rough estimate of how much of their phone bill was for work calls, but again, it’s up to you how much you want to have to explain to the IRS. The IRS isn’t clear about how much of your internet is deductible. Again, consult your accountant.
Unfortunately, the home office deduction doesn’t seem adjusted to how many millennial, city-dwelling freelancers work. The complexities of home office deductions are one of the many reasons that accountants, according to Garofalo, “should be able to save you more than they cost,” More importantly, working with one can assure you that you aren’t giving away too much of your hard-earned freelance income to the IRS.
Forget about keeping painstaking records and storing every receipt. Wingspan's new bookkeeping feature will flag tax deductions in real-time, so you can take care of business. Sign up here.
You may also like: