Can I Deduct That? Home Office

Welcome to the second installment of Timber's #canIdeductthat series aimed at helping small business owners with their taxes. If you missed the first one, you can catch up here.

 
Home Office Deduction
 

 

As a freelancer, you probably have a home office. Are you maximizing your allowable deduction? There are a couple rules, but generally speaking, you are entitled to a legitimate business deduction for a space you use regularly and exclusively for business.

Two methods: "Simplified" and "Regular" along with a few basic rules that apply no matter which method you decide is right for you.

Methods for calculating the deduction.

Simplified

The Simplified method is the IRS's attempt to make life easier for you. All you need is the square footage of the space used exclusively for business, multiply that by the standard rate, just like the mileage rate in our Auto & Mileage deduction series.  That’s all you the info you need to calculate your potential deduction amount, as long as you “pass” one of the three additional test, that will be your deduction!

Regular

The Regular method involves more documents and calculations. You need to track the total indirect and direct expenses to your home office. For indirect, think the cost of heating your home, multiplied by your business use percentage. Direct expenses would be fully deductible, this could include any painting or repairs to make your home office ready.

Now that we understand the two methods, what are the hoops we have to jump through to actually take the deduction? The good news is, you only have to jump through one to make your deduction, whether using the Simplified or Regular method, allowable.

Tests to be eligible for the deduction.

Regular and Exclusive Use

This is the most common situation. You use your spare bedroom or den as your office all of the time. This is ideal. A table in the dining room or a desk may not qualify for the home office deduction. Same for a desk in your studio apartment. It's much more difficult to argue that the desk is never used for, say, Netflix and...

If you didn't pass the 'regular and exclusive' use test, we have a few other options. The space must pass one of the remaining tests:  

Principal Place of Business

If your home is your principal place of business, then you may qualify for a deduction as well. This means you don't have another office. If all your business mail is delivered to your home, this basically ticks the box.

Meetings

Do you use your home regularly as a place to discuss terms or meet with customers, clients, or patients? Then you're probably going to qualify for a deduction as well.

Separate Structure

Did you spiff up that pool house out back? So long as that's where you do your work, that will qualify as well. More likely than not, using the Regular Method will be most favorable, and even easier to track.

Conclusion

You are entitled to a legitimate business deduction for the use of your home as a self-employed person. There are two ways, Simplified and Regular. We recommend computing both to determine which yields the highest deduction. If you prefer to track fewer excel files and expense records, just go with the Simplified Method. Both methods require you to jump through one hurdle to qualify: principal place of business, meeting people, or a separate structure. This is the second Timber Tax's #canIdeductthat series. If you have a question or suggestion for an article, email us at luke@timbertax.co!

References

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/pub/irs-pdf/p587.pdf