The COVID-19 pandemic changed how we work and how we feel about work. Remote work led many to see that they can have a better work-life balance.
They also realized that they could find more work opportunities by freelancing. In fact, about 36% of the workforce is comprised of freelancers.
Freelancing brings many benefits, such as the ability to claim business deductions on income taxes. One of the most misunderstood deductions is the tax break for home office deduction.
It’s a murky area of tax law that could get you in trouble with the IRS if you don’t fully get it. Don’t worry, this guide has you completely covered.
Read on to learn everything you need to know about home office tax breaks.
Can You Get a Tax Break for Home Office?
Yes, you can as long as the space qualifies under IRS home office rules.
The space that you use has to be used exclusively for business purposes. For instance, if you work primarily at your dining room table, that’s not exclusive business use.
A spare bedroom that serves as an office during the day and a game room at right isn’t exclusive use, either. Exclusive use means that you have a designated space for business purposes.
The space has to be your primary business location and you have to use it regularly.
Home Office Tax Deductions
Assuming that your home office qualifies for deductions, you can deduct a lot of expenses and claim them as home office deductions.
You can deduct rent, mortgage, mortgage interest, insurance, utilities, and property taxes. You also have to take depreciation into account if you own your home.
What about home additions like solar panels? If you deduct home office expenses already, you may be able to deduct solar ownership costs.
Calculating Home Office Tax Deductions
The IRS has two methods to calculate home office tax breaks. One is the simplified method, where you calculate the square footage used for business.
You then multiply that by $5 to claim your deduction. This method only allows you to deduct 300 square feet. That makes the maximum deduction $1500.
The alternative method is to do a standard calculation. You take the square footage used for business and divide that by the total square footage of your home.
That gives you a percentage. You multiply the percentage by the total amount paid for deductible expenses.
For instance, if you have a 1500 square foot home and use 150 square feet for an office, you use 10% of your home for business.
Let’s say you pay $1000 in rent each month. You can deduct 10% of the rent or $100 each month. This method lets you deduct more, but you have to keep paperwork to prove the expenses.
A Guide to the Tax Break for Home Office
Being in business for yourself and working from home gives you a lot of advantages. You can deduct business expenses and get a tax break for home office.
This guide showed you how to qualify and calculate home office tax deductions. If you learned a lot from this guide, be sure to check out the other helpful guides in the blog.
