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Home
Office Deductions for Freelancers
by Rachel Goldstein owner of Allfreelancework.com
- 1000s of freelance jobs
Home
office deductions are one of the perks of working from
home, however, there are clear drawbacks too. If you
meet the IRS guidelines for deducting your home office,
you can expect to get a hefty tax break. On the other
hand, deducting your home office can increase your chances
of getting audited. Additionally, by claiming your home
office you can get taxed when selling your home. This
article will cover the ins and outs of home office deductions.
IRS
GUIDELINES
Is
your home office your "principal place of business"?
Is your office used "regularly and exclusively" for
business? All of the above questions must be answered
with a "yes" if you want to meet IRS guidelines for
deducting your home office.
"PRINCIPAL
PLACE OF BUSINESS" -
How
do you know if your office can be determined as your
principal place of business? Well, do you spend most
of your time and make the most of your money from your
home office? If you work onsite at a client's office
the majority of the time, then you probably aren't eligible.
On the other hand, if you perform all of your daily
tasks from your home office, you probably are eligible.
However, if you are offsite a majority of the day, but
come home and perform substantially administrative activities
from your home office, you may still be eligible. You
cannot perform these administrative activities anywhere
else but from your home office.
"REGULARLY
AND EXCLUSIVELY" -
You must use your home office regularly and exclusively.
Your office doesn't need to be a separate room, but
it does need to be used "regularly and exclusively"
for business. This means that you need to keep all family
activities and items away from your office. Keep your
children off of your computer and your personal mail
off of your desk, amongst other things. Additionally,
if you have more than one business, you cannot use your
home office for your other business. For example, if
you are a salaried web designer, you cannot work on
projects from your salaried job in your home office.
You
have decided that you are eligible for a home office
deduction. Now what? I would contact an accountant and
make sure that you have made the right decision. Then:
a.
Measure square footage of your entire home
b.
Measure square footage of your home office
c.
Divide office's square footage by your home office's
square footage
d.
This number is your percentage….Apply this percentage
to indirect expenses, like your mortgage taxes, utility
bills, real estate taxes, and upkeep. So, you can deduct
a percentage of home-related expenses based on the percentage
of space in your home that your home office takes up.
So if your house is 5,000 square feet and your office
is 500 square feet, you can deduct 10% off indirect
expenses and home cost. Don't worry, direct expenses
are still deducted in full. For example, don't use the
percentage on things such as a business phone line.
e. Find out home purchase price and add to that all
home improvements
f.
Find out the value of land
g.
Find out the market value of your home.
REASONS
HOME OFFICE DEDUCTIONS ARE SOMETIMES NOT WISE TO TAKE
Yes,
taking a home office deduction sounds like a great idea,
but remember there is a downside too. If you deduct
your home office, your office may be considered business
property. This means that you will need to pay taxes
on the amount the business depreciated when you sell
your house. Because of this, a home office deduction
might not be profitable for you. You might save a few
hundred dollars every year with the home office deduction,
but have to pay thousands of dollars when you sell the
house. Because of this, I recommend visiting a tax accountant
before deducting a home office.
Another reason not to take the home office deduction
is because the IRS might decide to audit your business
when they see your home office deduction. Taking this
deduction is like throwing a red flag in front of the
IRS, so it is up to you whether you want to take the
risk and deduct your home office.
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