Disclaimer: This post is newly updated, and is not a substitute for the guidance of a tax professional.
If you’re still working on your tax preparations, we’re not judging. Hopefully, you’re striving to keep as much of your hard-earned income as possible. An often-neglected deduction for self-employed professionals is the home office deduction.
In the U.S., many people who qualify for the home office deduction (via Form 8829 – Expenses for the Business Use of Your Home) choose not to take it. Whether because of a fear of being audited (which many experts agree is exaggerated) or the confusion/hassle factor, many people who could legitimately use this tax break do not.
Two Methods for the Home Office Deduction
Do you report your business income on a Schedule C and have a home office that is used “regularly and exclusively for business?” If so, and you don’t take the home office deduction, you may be leaving money on the table.
There are two calculation methods to choose from, both of which use the square footage of your home office as the basis: the traditional home office deduction, which is based on expenses, and the simplified method, which allows you to deduct a flat $5 per square foot, with a maximum write-off of $1,500 (based on a maximum of 300 square feet).
I would put the Simplified method in the “better than nothing” category. If you don’t feel comfortable with your records for last year, the Simplified method offers an easy way to get a deduction (this new approach was introduced in 2013).
Designed to minimize paperwork, it’s better than taking no deduction at all. However, most Solo PR Pros will likely come out ahead using the traditional method of filing a Form 8829 (for example, my home office deduction has never been less than $4,000).
Using the traditional method, you calculate the percentage of your home dedicated to your home office, and then that percentage of your home operating costs is deductible. These are called “indirect expenses,” and can include everything from utilities to maintenance.
For example, if you have a 200 square foot office in a 2,000 square foot home, that means 10% of your home is dedicated to your home office (and if you’re like me and use a large room for your home office, the percentage can be higher). In this example, you can deduct 10% of the costs of maintaining your home (mortgage interest or rent, utilities, maintenance, etc.) from your business profits on the Schedule C. These are called indirect expenses.
Solo PR PRO Premium members, click here to download the Indirect Expense Calculator template. And don't miss our members-only post: What You Can Deduct – And Other Tips I Wouldn’t Say Publicly!
Regardless of which method you choose, reducing your net profit by the home office deduction reduces the amount of income you’re being taxed on, which means more money stays in your pocket – always a good thing! Consult a tax professional to see if you qualify.
In short, no one wants to be audited, but as long as you’re not trying to pull some funny business, the risks probably don’t outweigh the rewards. Even if you are audited, if you’ve obeyed the rules you should be fine. I’ve taken the home office deduction for more than 20 years (including my early days living in apartments), and I’ve never been audited (knock wood).
As my first accountant used to say, “it's not what you earn, it's what you keep.”
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