One of the reasons you decided to work freelance, whether part-time or full-time, is to have the chance to work from home. You may receive some tax benefits from having a home office. Read on to learn how can you take the home office deduction on your taxes.
Home Office Deduction Rules
First, the IRS requires you to use your home office “exclusively and regularly” as the primary place you do business or, if you have another office, you must use your home office to meet with clients to do business.
Exclusive means you only use that space to do business. If your kids also use your home office for recreation, the IRS says it doesn’t meet the exclusivity rule. If you have a space in the room that’s off limits to the kids, you can count that space only if the space is clearly sectioned off from the rest of the room.
Your home office needs to be your “principle place of business.” You can do work from the local coffee shop, but you must do your administrative activities, like billing clients, from your home office. You can’t have another fixed location that you do administrative activities for your business.
The home office deduction is based on the percentage of your home that you use for business. So, if your home office is a 400 square-foot room in a 1000 square-foot house, you can deduct 40% of certain home expenses.
You may not be able to take the home office deduction if your business has a net loss – your business’ gross income is less than business expenses.
What Home Expenses Can You Deduct?
The home office deduction lets you claim certain expenses that you spent either toward maintaining your home or toward maintaining your home office.
- You can deduct any expenses you incurred directly related to the room. For example, any repairs made to the room can be deducted.
- You can also deduct a portion of the expense to maintain your home, as long as they are expenses you can’t deduct anyway. For example, you can deduct mortgage interest, property taxes, and casualty losses if you itemize your taxes, so those don’t qualify as home office deductions.
- You can deduct a percentage of your homeowner’s insurance, home repairs and maintenance expenses, and expenses.
- You can deduct a portion of your mortgage interest and property taxes.
- You can deduct a percentage of your rent or home depreciation.
How to Calculate Your Deduction
If you do your taxes manually, you can calculate your home office deduction using Form 8829, then enter the deduction on Schedule C of Form 1040.
I hate forms so I use Turbo Tax Home & Business Edition ($74.95 for the software, free Federal eFile, + state filing fees) to help figure out my home office deduction. The software prompts you to enter the total square footage of your home and the total square footage of your home office. Then, you enter your annual rent or mortgage expense and other annual house-related expenses like insurance and utilities. The software does the rest of the work.
You can’t take more home office deductions than your gross income from business, but you can carry over a home office deduction until next year’s tax if you max out your deduction amount.