Rent as a tax deduction is one of the most frequently misunderstood business expense write-offs. I get asked about it all the time from freelancers or business owners. Whether it's renting an apartment or an office space that you live in or work from, rent is likely to be one of your biggest tax deduction opportunities.
Maximizing your tax deductions while staying compliant with the IRS’s regulations is so important to being a profitable freelancer.
If you’re thinking that same question, you don’t have to navigate this alone! Check out the 3 ways business owners can use rent as a tax deduction.
The home office deduction is a common source of tax write-offs for many freelancers. This deduction simply is writing off a part of your home as a business expense.
The IRS outlines two requirements for your home office or workspace to qualify as a deduction:
To calculate your home office deduction, you must take the square footage of your home office (or workspace) divided by the square footage of your entire home. Then, you will utilize this percentage to apply to your monthly rent and any other qualified home expenses. So, if my office is 100 sq. ft, and my home is 1,000 sq. ft, my home office is 10% of my total home. I will apply this percentage to my $1,500/month rent and get a deduction of $150/month (or $1,800 annualized).
Voila -- you have a healthy tax deduction for expenses that you were already incurring. Win-win!
One commonly asked question: “If I use a corner of my bedroom as my home office, can I deduct that since it’s not a separate room?”
The answer: YES, as long as it meets the two IRS requirements you can measure the square footage of that corner and deduct in the same way you would a home office.
As you can see, calculating the home office deduction requires time and documentation. That being said, the IRS gives those who want the deduction but don’t want the hassle an out -- The Simplified Home Office Deduction.
If you’d rather not put the effort into keeping a detailed record for the regular method, you can instead use the simplified method to quickly calculate your home office deduction.
Using the simplified method, you can deduct $5 for every square foot of your home office or workspace. In most instances, this simplified deduction won’t give you as hefty of a tax deduction as the true calculation (check out our simplified vs actual scenario-level breakdown).
When you rent a designated office space, you can fully deduct any rent paid. In this scenario, you will not be able to take the home office deduction as well.
This functions much the same as renting a co-working space.
Paying rent to a co-working space can absolutely be fully deducted as a business expense. However, keep in mind that if you deduct your co-working space, you cannot take the home office deduction as well. No double dipping!
If you rent a co-working space for half of the year and work from home for the other half of the year, you can take the home office deduction for the part of the time you spent taking care of business from home. Just remember to keep detailed records in case it ever came into question by our lovely friends at the IRS!
That being said, it is much more likely that the rent you’re paying for a dedicated office space is much higher than your home office deduction. For example, if you pay $500/month for renting a dedicated office, your tax deduction would be $6,000 for the year. This is a greater tax saving than the $1,800 annualized home office deduction example from above.
Renting short-term homes through Airbnb or VRBO is common for many freelancers who consider themselves “digital nomads”. These vacation rentals may serve as your home for a period of time and you’ll work from there the same way you would any other home.
It is possible to make a case that you can deduct your work space in your short-term home rental in much the same way you can deduct your home office. However, the IRS has not issued much guidance to this matter.
If you are going to utilize a portion of your vacation home rental, it’s important to stay organized and keep thorough documentation to support your position. The things you want to keep documented are as follows:
Likely, if you are moving around quite frequently (like a digital nomad), it will be much harder to support your position than if you were to work somewhere for 3-6 months at a time and then move to another apartment or rental.
If you are traveling for work, you would just use the business travel deduction.
Taking rent as a tax deduction is likely one of the largest deductions you’ll be able to take as a freelancer or solopreneur. As with any tax deduction, it's important to stay organized throughout the year. Consider Keeper Tax’s expense tracker to help you keep more of your hard-earned money.
Keeper finds tax deductible expenses among your purchases ... automatically! Save $1000s a year claiming the tax write offs you’re eligible for as a contractor.