With the shift towards working from home amidst the pandemic, many are finding themselves performing more of their duties from home. A home office is a great tax deduction that can decrease your tax liability and lets your business pay for expenses that you already have to pay for in your day to day life.
Can I take advantage of the home office deduction?
- Your home office is only used for business purposes – With current tax law, only self employed individuals who have a dedicated office space used for working within their homes can take this deduction. Ex: if you have a home office in a room, then it cannot double as a media room, you must carve out a specific spot that is exclusively used for business.
- Your home office is your primary place of business – You need to demonstrate that your home office is the primary place you conduct business. This means that you can meet clients and conduct meetings in different locations, but your home office should be the only location where your administrative work is completed. Generally, many of the administrative tasks will need to be done from home in many types of businesses. For that reason many 1099 recipients can take advantage of this deduction in a multitude of professions: some examples being real estate agents, consultants, freelancers, salespeople etc.
What if I am not self employed? What can I do?
- Become an independent contractor – the easiest way to deduct home office expenses is by switching from a W2 employee to an independent contractor. With some companies cutting hours and pay, this may be an option worth exploring. When deciding to make this switch keep in mind that some expenses like health insurance, additional costs of self employment taxes, potential lost benefits are items to consider. If you can meet the IRS requirements to become an independent contractor – it may be worth calculating if this route makes sense for you. If you need help deciding, reach out to your booked financial rep.
- Start a side hustle – If becoming a contractor full time isn’t an option, consider starting a side hustle. You can deduct all business related expenses on your tax return including expenses relating to a home office.
- Consider your entire household – Even if you don’t qualify for the home office deduction, there may be someone in your home that may qualify. Look into your options and see if other family members may take advantage of this deduction.
How should I setup a home office?
One of the IRS requirements of a home office is that it must be a portion of your home used exclusively for business. If you don’t have a separate dedicated room for your office, partition off a portion of your home the best that you can (perhaps using some folding screen doors or other partition method). For tax purposes – make sure you begin keeping track of the expenses used specifically for your office. Another benefit is that you may also keep track of large repairs and maintenance that you may need to do on the rest of your main home as depreciation can be taken as a deduction within the home office expense – saving you money when you need to do larger home repairs.
Summary
The home office deduction is a great tool for all self-employed or 1099 individuals who are required by their profession to maintain some sort of presence online and need to use their home for either administrative or other functions. With the right guidance, the home office, is a great deduction that lets business owners save money on their taxes and take the opportunity to decrease costs in repairs and maintenance on their home. Figuring out how to properly deduct your home office or get reimbursed by your employer can be complex, so if you need help reach out to Booked Financial today
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