If you are a freelancer who works in a designated section of your home, you may be eligible to claim a home office deduction from your taxes. There are a large number of expenses you can claim and methods for calculating your deductions for your home office...but what are the limits? Depending on what method you select, there will be certain limits.
In this article, we'll go over the home office deduction limitation for how much you can deduct from your taxes. First, let's review the different methods for claiming this tax break.
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Requirements To Qualify For The Home Office Tax Deduction
If you want to claim the home office deduction, you'd need to meet certain requirements. Just because you work from home sometimes, does not mean you qualify for this tax credit.
Your home office must:
- Be your principal or main place of business
- Be regularly used
- Only be used for business purposes
To help you determine if your home office qualifies as a principal place of business, you'll need to look at this list of activities that count:
- Administrative or management activities i.e. billing customers or clients, ordering supplies, setting up appointments.
- Client meetings
- Delivering or selling goods or services
- How much time you spend in your home office
- Exclusive and regular use for business purposes. Your home office space has to be used solely for conducting business activities.
If you qualify, you can follow these Form 8829 instructions to claim a home office deduction.
Simplified Method
It's fairly easy to calculate the Simplified method for a home office deduction. Instead of keeping track of all your home office expenses, you can just measure the size of your designated home office space.
In 2021, the home office you are able to claim $5 per square foot of home office space with a limit of 300 square feet. So, the maximum deduction you can claim if you use the simplified method is $1,500 per year. It should be noted that if you claim home office deductions using this method, you do not need to organize and categorize your expenses.
You'll just need to measure the square footage of your home office in which you use as your principal place of business and exclusively for business. We'll explain more about this in the next section.
If you don't want to save and categorize your receipts, this deduction method may be the option for you. Be warned, however, business owners typically save more money recording receipts as it leads to a larger deduction.
When you elect to take this method, you cannot deduct any depreciation or section 179 expense for the space being used as the home office.
Actual expenses not related to your home office can still be deducted such as marketing, supplies, or equipment expenses.
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Actual Home Office Expenses Method
In order to calculate your home office's actual expenses, you'll need to track qualifying business expenses. Here are some guidelines to follow in order to help you understand if an expense counts as a write-off by using the regular method.
What Qualifies As Home Office Expenses?
The IRS has some requirements for deductible home office expenses. There are three general questions you could ask yourself to determine if expenses qualify as tax write-offs.
- Is this expense only for my home office? Any expenses that are only used for the home office are entirely deductible. These are called a "direct expense". For instance, deductible business expenses would include repairs for the office or the installation of window blinds for client meetings. Direct expenses to the business part of your home are deductible.
- Can this expense be used for the entire house? Now, let's talk about the other side of the coin, "indirect" expenses. Purchases that fall into this category are if the expense applies to the entire house. Since you'll use these expenses for personal and business, you only be able to deduct the business portion of these expenses. For example, air-conditioning, heating expenses, rent, mortgage interest/payments, real estate taxes, general home repairs, and other expenses all fall into this category.
- Was the expense made for a non-business portion section of the home? If you spend money on expenses that were for the non-business use section of your house, none of the expenses can be written off. For example, you cannot claim a home office deduction for expenses related to adding a personal bathtub to your master bedroom or kitchen remodeling.
A space doesn't have to be the only place where you work. You can do administrative tasks or activities your business. For example, if you are a contract therapist.
If you have to visit client's homes to perform your sessions but you do administrative activities at your home office, you can still qualify for the home office deduction.
Remember, tracking receipts deducting actual expenses often lead to a greater deduction. Try our free home office deduction expense sheet to track your expenses.
List of Legitimate Business Expenses
Remember, in order to claim business deductions, expenses need to be related to your business. Here is a list of common allowable office-based deductions you can claim in full on a Schedule A.
- Deduct mortgage interest
- Rent
- Repairs
- Utility expenses such as air conditioning
- Insurance
- Home depreciation
- Real Estate taxes
- Property taxes
Audit Risks For The Home Office Tax Deduction
Certain expenses can only be used to the extent of your business income.
Be warned that if you claim too many tax deductions, you could trigger an IRS tax audit.
You see, the IRS has an automated system that looks out for red flags in order to catch tax fraud. Every tax return is compared to other taxpayers who have similar tax profiles i.e. professions.
For example, let's say the average person in your profession deducts 6% of their income for travel expenses. If you deduct 25% of your income to travel expenses, this will likely get you audited.
There's a lot of talk about an audit risk for the home office deduction. This is because many small business owners tried to take advantage of this tax write-off when it was first introduced.
Many self-employed folks, even those who do legitimately work at home, do not have a specific, exclusive area that is used solely for business.
Deduction Limitation
You cannot claim more than the gross income of your business in a tax year. For instance, if your gross income is $7,000, then you cannot deduct $9,000 as home office expense. So, your business income can be a deduction limit.
All you really have to do in order to stay safe is have reasonable and well-documented records of your home office expenses. If you are an employee, you cannot claim a home office deduction.
Just because an office building closes, does not mean you qualify for this tax break.
What If You Are Self-Employed For Only Part Of The Year?
Let's say you work a full-time job and you started freelancing at the end of the year. You'll file a W2 along with your 1099. How do you write off home office expense deductions?
Well, if this is the case, the home office expenses would be divvied up by the portion that you were self-employed. For example, let's say you figured out how to get freelance writing clients in October.
The home office expenses would be calculated by using your 3 months of work if you used the simplified home office method. So, if you claim a 200 square foot office, that multiplied by the IRS rate is $1000.
Since you worked for 3 months as a freelancer from home, then you would only be eligible to deduct $250.
In Summary
A home office reimbursement has its limitations. However, as long as you don't try to take advantage of this tax break and maintain good records, you won't get in trouble with the IRS at the end of the tax year.
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You won't need to store or hoard your tax receipts because Bonsai Tax will do it all for you. Users typically save $5,600 by using our app. See how much you'll save by trying a 7-day free trial here.
