Profit Planners, rejoice! There's a new deduction in town.
Actually, it's not that new. It's been around since 2013. But it remains one of the most ignored deductions available to online business owners. Consider this statistic:
Although an estimated 26 million Americans have home offices, just 3.4 million taxpayers claim home-office deductions.
For those suffering from audit paranoia, Forbes writer Richard Eisenberg offers this advice:
Get over it. Tax sharpies I’ve spoken to say they believe home offices no longer set off alarms at the Internal Revenue Service.
These tax sharpies agree: the home office deduction is a must-do for online business owners like you. The IRS is basically sneaking you back some money before like an overindulgent grandma.
Unlike your grandma, though, you do have to prove you deserve this deduction.
What Counts as a Home Office?
The IRS says you can claim a home office deduction if you regularly and exclusively use that part of your home for business.
But what if, like me, you and your laptop migrate around your entire home throughout the course of the day?
- I like to start in my home's northeast corner by the back door, using the washing machine as my desk and getting the warm morning light on my back.
- After noon, I'm on the southwest side of the house, getting sunblasted in the face.
- By EOD, I'm tying up loose ends while curled up on the living room floor.
- Naturally, there are frequent trips to the kitchen throughout, because caffeine.
There's not a corner of my home that I don't use “regularly” for working. But none of them are truly exclusive. Am I S.O.L. on the home office deduction?
The answer is no. But I/you/we all have to be up front about it.
The honest truth is that the kitchen gets more use from food preparation than from office work–in other words, it doesn't count. Living room–also a no. However, I don't spend much time hanging out in those sunny corners except when I'm working. So those qualify as my home office.
I just did the math, and those two spots add up to 100 square feet. Which means I'm looking at a $500 home office deduction.
The home office deduction comes in two flavors: Simplified and Regular.
The simplified method of home office deduction allows you to take a standard deduction: $5 per square foot of your home office, with a max deduction of $1500 (or 300 square feet).
The regular method of home office deduction is calculated on your actual expenses. This is the better route if you think your write-offs would vastly exceed $1,500 OR your home office is much larger than 300 square feet.
Either way, the important thing is to keep your records.
Pro tip: If you plan to write off a home office, for heaven's sake take a photo of it, just in case the IRS ever does audit you.
Other Questions about the Home Office Deduction
My home office is a guest bedroom where I also store holiday decorations/old photo albums/spelling bee trophies/Mardi Gras costumes.
In that case, you have to subtract the space taken up by…um, other stuff…from the square footage of your office.
My home office serves double duty as my family's [fill in the blank] room.
That blurs the line, and the IRS likes it black and white. If you're working in the office while for example, your kids are doing homework on the floor beside you, it's probably okay. But honestly, if you want to claim it as a deduction, the kids need to find a new study hall spot. Them's the rules.
Sometimes I use a coworking space/go to a coffee shop. Can I still deduct my home office?
Actually yes! As long as the majority of your business-running time is spent at your home office, the occasional (or even frequent) field trip is totally fine as far as home office deduction goes.
I run my biz from home but my work takes me out to other locations.
Still counts. If you're doing the administrative stuff from your home (invoicing, scheduling, etc.), then you've got a legit home office deduction.
Do I have to own my home to claim a home office deduction?
Nope! You can use the simplified home office deduction just like everybody else–$5 per square foot. If you go with the regular home office deduction, just calculate your office's percentage of your home's total square footage, then deduct that percentage of your monthly rent. So if you pay $1000 per month for your apartment, and your home office is 20% of your total square footage, you can claim a deduction of $200.
Do I also get to deduct my utilities?
If you're doing the regular deduction (not the simplified), then heck yes! You do it the same way listed above: by calculating your office's percentage of your home's total square footage, then claiming that same percentage of your home maintenance expenses. So if your home office square footage is 20% of your home, then 20% of your utilities, security system, home/renter's insurance, mortgage interest, etc. are deductible as well.
However, you'll also have to file 43-line Form 8829 “Expenses for Business Use of Your Home.” So there's that.
Again, if you think your write-offs would be >$1500 or your home office is >300 square feet, then it's worth to go the regular home office deduction route.
But for most people, the simplified home office deduction route is going to make way more sense.
(It also might be what saves your sanity. Especially if you've been dealing with the Shared Responsibility Payment worksheet after not having health insurance last year. …Don't even get me started.)
The Bottom Line
As TurboTax's lead CPA says, the biggest mistake online business owners make when it comes to the home office deduction is not claiming it.
So claim it already!