December 28, 2020 5 min read
Opinions expressed by Entrepreneur contributors are their own.
This is the third in a series of original columns for Entrepreneur.com by Laura D. Adams that will publish two Mondays a month. And don’t forget to purchase a copy of Adams’ latest book for Entrepreneur Press, Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers, via Amazon | Barnes & Noble | Bookshop | IndieBound.
No one can deny that the pandemic’s health and financial challenges have been traumatic for many individuals, families and businesses this year. Record unemployment and business closures have left a wake of hardship for millions of Americans.
If there’s one bright side of social distancing to consider, it may be the normalization of working from home, either as a remote employee or as your own boss, when possible. Here are eight tips to reduce both your business and personal expenses when you claim the home-office tax deduction.
1. You must have self-employment income
The home-office tax deduction is used to benefit anyone who maintained a dedicated space in their home used solely and exclusively for business. It includes the self-employed and, in certain situations, employees working remotely for the convenience of their employer.
However, the Tax Cuts and Jobs Act significantly changed this tax break. Starting in 2018, employees working from home no longer qualified for a home-office tax deduction.
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2. You don’t have to be a full-time entrepreneur
If you work part-time on your business from home or also have a day job, you still qualify to claim the home-office tax deduction. You don’t have to have a full-time business to claim legitimate home-office expenses.
3. You don’t have to be a homeowner
If you’re self-employed, you don’t have to own your home to qualify for the home-office deduction. It’s available to renters, and no matter what kind of home you have. You might live and work in a single-family home, detached garage, condo, co-op, mobile home, apartment or a live-aboard boat, and you’ll be eligible regardless.
4. You must satisfy usage requirements
If you’re self-employed, you must use a home office as the primary place you conduct business to qualify for the deduction. You must also have an identifiable space where you work, such as a guest room, nook or a detached studio that can be measured.
5. You can also work outside of your home
Your home office doesn’t have to be the only place you work or meet customers to qualify for the home-office tax deduction. For instance, you might also occasionally work at a coffee shop or a co-working space, or meet clients in their homes.
6. Your direct home-office expenses are fully deductible
Direct expenses for your office area, such as flooring, furniture, window treatments or an additional phone line, are 100% deductible. However, you can’t deduct improvements outside of your office or home, such as landscaping, installing a pool or remodeling your kitchen.
7. Your indirect home-office expenses are partially deductible
Indirect office expenses apply to your entire home, such as rent, mortgage interest, property taxes, insurance, cleaning and utilities. You’d have these costs even if you didn’t have a home office. They’re partially deductible based on your office’s size and the calculation method you choose. Keep reading to learn more.
8. You choose the best way to calculate your deduction
You can choose one of the following calculation methods for your home office in any tax year:
- The standard deduction requires you to calculate your office’s percentage of your home space and apply it to your expenses. For example, if your office is 10% of your home, you can attribute 10% of qualifying expenses to business use.
- The simplified deduction allows you to claim $5 per square foot of your office area, up to a maximum of 300 square feet. This eliminates having to keep detailed records, but won’t give you the largest deduction when your office exceeds 300 square feet.
If you’re eligible to claim the home-office deduction, it’s a terrific way to make certain personal expenses partially deductible. You can use Form 8829, Expenses for Business Use of Your Home, to figure the allowable expenses and enter them on Schedule C, Profit or Loss From Business, when you file taxes.
However, there’s a limit on how much you can claim; you can’t deduct more than your business’ gross income. When your qualified deductions exceed your business income, you can carry over the excess to the next tax year. See Publication 587, Business Use of Your Home, for more details.
Don’t forget that your business expenses — such as office supplies, equipment and software — are fully deductible as ordinary business expenses no matter where you work. You can learn more in Publication 535, Business Expenses.
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If you have questions about claiming business or home-office expenses, it’s a good idea to consult with a qualified tax accountant. They can help you maximize every legitimate tax deduction possible and save more money when you’re self-employed.