Working from home is one of the greatest perks of being a freelancer, especially if you operate your business from home full-time. It also provides you with a significant tax deduction, if you qualify for the home office deduction.
Most self-employed individuals have long since operated their businesses from the comfort of their homes. According to the 2019 report released by NCS from the Federal Bureau of Labor Statistics, only 9.8 million U.S. workers, out of our nation’s approximately 140 million workforces, had access to a flexible workplace.
If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation.
Generally, one can write off the following expenses under the home office deduction:
Rent
A percentage of your monthly rent is tax-deductible for every month you claim a home office expense.
Insurance
You can write off the cost of insurance (home/renter/property insurance) that covers the business part of your home.
Utilities
Basic utilities like electricity, gas, water and trash removal are typically personal expenses. The bonus with having a home office is that you’ll be able to write off a portion of these costs.
Home essentials
Cleaning supplies, soap, toilet paper, and other necessities are partially tax-deductible.
Home office furniture
Any furniture that you bought for your workstation is fully tax-deductible. Since they’re used exclusively for business activities, you’ll be able to deduct 100% of the cost
Wi-Fi bill
Internet connection is a necessity, especially if you are working from home. So you can even claim your Wi-Fi bills on your taxes!
Property taxes
Just like the mortgage interest write-off, you can also deduct a portion of your real estate taxes.
Telephone
If you happen to have a landline connection, part of it can be written off.
Home repairs and maintenance
Any sort of home office repairs can be written off. However, if you are renovating the home in its entirety, you’ll get a partial write-off.
Calculating the home office deduction
When it comes to calculating your home office expenses, the IRS offers methods to claim this write-off — the simplified method, and the regular method. You can only pick one.
The Regular Method requires you to calculate your actual home office expenses and keep detailed records in the event of an audit. When it comes to computing tax deductions using the regular method, the deduction amount is based on the percentage of the house devoted to being an office space.
The simplified method reduces the burden of recordkeeping by allowing you to multiply the allowable square footage of the office by an IRS prescribed rate, so you won’t have to calculate each individual expense. . However, this simplified method has limitations. The IRS has set a rate of $5/square foot and the maximum size for this option is 300 square feet. Therefore, the maximum deduction under the simplified method is $1,500.
When it comes to choosing the ideal method, it’s a good idea to calculate your taxes with both methods and choose the one which works best.
The simplified option is easier on recordkeeping but may result in a smaller tax break, while the regular option requires more complicated calculations, but can provide you with a larger deduction.
If you reside in an expensive area where mortgage and rent payments are costly, you might find added benefit in using the home office deduction — even if that home office is small.
But to avoid getting audited, you’ll need to carefully calculate the expenses before claiming this valuable home office deduction. To calculate the accurate amount, you can use bookkeeping software like FlyFin. The FlyFin app can help you calculate your taxes through AI and make the right decisions. Plus, it’s backed by CPAs whom you can consult to determine which deduction method works best for you.
