As A Self-Employed Worker, Can You Write Off Rooms?

Because of the coronavirus or COVID-19 pandemic, many businesses have closed their offices and working from home has become the normal – whether you started your own business, work remotely for an employer or were sent home for a few weeks for quarantine purposes.  If you are a small business owner who works from home, you may be wondering whether you’re eligible to claim a home office deduction on your taxes.  To qualify for that deduction, however, you need to meet a few conditions.  

Let’s dive into what key criteria should be met for taxpayers to claim the home office deduction.

Employee vs Freelancer  

Unfortunately, if you’re an employee, the home office deduction is no longer an option. The Tax Cuts and Jobs Act eliminated the home office deduction for employees who work from home for an employer.  However, self-employed freelancers can still deduct their home office expenses from their business income if they qualify.  

Homeowner vs Renter vs Traveler

They can claim the deduction whether they’re a homeowner or a renter.  Also, freelancers can use the deduction for any type of home where they reside – a single-family home, a condo, a mobile home, or an apartment.  A hotel room or other temporary lodging doesn’t apply as a write-off for a home office, though.  

Regular and Exclusive Use

Generally, self-employed taxpayers must use a part of their home regularly and exclusively for business purposes and not personal use. Your entire home is not tax-deductible. This home office or part of your house used for business must also be:

  • A principal place of business
  • A place where taxpayers meet clients or customers in the normal course of business, or
  • A separate structure not attached to the home (e.g. a garage, barn, greenhouse or studio)

Regular use means you use part of the home on a continuous, recurring, or ongoing basis to count as a business expense.  

Deductible Expenses

What home office expenses can you write off?

Taxpayers can deduct certain expenses such as rent, mortgage interest, insurance, utilities, repairs, maintenance, and depreciation.  You cannot write off the whole amount of these expenses unless they’re direct expenses to the business part of your home – such as repairs in the are you use for business.  For the most time, having a home office allows you to write off a percentage of all home-related expenses: rent, utilities, insurance, property taxes, telephone, internet, security system, cleaning, and mortgage interest, etc.  

You can select any reasonable method for deducting the business percentage of your home used for your business and use the same method each year.  This is called actual-expenses method.  

Example: Let’s say you paid $5000 in mortgage interest, $2000 in utilities, and $500 in insurance during the year.  Your home office occupies 500 square feet in a 2,500-square-foot home, 20% of your expenses can be claimed.  As such, $7,500 X 20% = $1,500 can be used as your home office deduction.  

Direct Expenses

If mortgage interest, rent, insurance are indirect expenses for which only portion of expenses can be claimed, there are direct expenses that are used exclusively for business in your home office.  These direct expenses can be deducted in full.  Examples of direct expenses include:

  • Desk
  • Printer
  • Office chair
  • A business telephone line
  • Repairs and maintenance including new paint
  • Art and décor
  • Headphones used for online meetings

Simplified Option

You can choose to use simplified method for figuring out your home office deduction.  To use the simplified option, you multiply the allowable square footage of the office by a rate of $5.  The maximum footage allowed is 300 square feet.  Therefore, the maximum deduction under this method is $1,500.  Although this method doesn’t change the rules for claiming a home office deduction, it saves time and makes it easier to keep records.  

Net Positive Business Income

Even if you have an eligible home office deduction, if you don’t have a positive net income, you cannot claim the home office deduction.  Additionally, you cannot use the home office deduction to generate a loss in your business.  You can only take the home office deduction up to your total net business income.  For example, if your net business income is $8,000 and your home office deduction is $10,000, only $8,000 can be deducted to offset your net business income.  

Just A Few Months Versus A Whole Year

As long as the home office is used regularly and exclusively for business during particular period, you’re able to take a partial-year home office deduction by prorating the amount based on the number of months that you worked from home.  For example, if your home office is 200 square feet and your work there for eight months, you can get a $667 deduction ($5 x 200 x 8/12). Or you can deduct a portion of your actual expenses (e.g. mortgage interest, utilities and insurance based on the percentage of your home’s square footage that you’re using as a home office) for the months when you’re working from home.  

Form 8829

If you’re interested in claiming the home office deduction, you need to fill out the IRS Form 8829.  Use Form 9928 to figure the allowable expenses for business use of your home on Schedule C (Form 1040) and any carryover to the next year of amounts not deductible this year.  

Partnership vs Corporation

Business owners structured in partnership can deduct home office deductions on their individual income tax return only when the partner is expected to pay the expense without reimbursement.  However, business expenses personally paid by corporation shareholders and that are not reimbursed, are not deductible as they are treated as unreimbursed “employee “business expenses.  

IRS Audit

Claiming a home office deduction can raise a red flag for an IRS audit as many people claim those expenses even when they don’t qualify.  As far as you’re eligible for those deductions and follow the rules, you don’t need to be afraid to take a home office deduction.  

Take Advantage Of This Tax Deduction!

There's a long list of 1099 deductions... but the home office deduction can save freelancers and business owners a substantial amount in taxes in the United States.  Be prepared and gather all your receipts and statements to calculate and justify your deduction for a home office in the following year.  Remember, reducing your business’s net income not only reduces your income tax, but also your self-employment tax!

Discover your tax write-offs

Keeper Tax automatically finds tax write-offs among your purchases. On average, people find $1,249 extra savings in under 10 minutes!

get the app→
Soo Lee

Soo Lee

websitetwitter-link

Soo has extensive experience in publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diversified industries including manufacturing, wholesale/retail businesses, construction, real estate development and investment, banking, finance and professional/legal consulting service. Soo earned her B.B.A. in Accounting from Ohio State University and Master of Taxation from Georgia State University. Soo is a Certified Public Accountant in Georgia and a member of the American Institute of Certified Public Accountants.

Automatic tax savings for 1099 contractors.

Keeper Tax automatically finds tax deductions among your purchases. On average, people discover write-offs worth $1,249 in 90 seconds.

get the app→

Note: at Keeper Tax, we're on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please reach out via email if you have questions.