With April 15 fast approaching, we’ve already given you six things to know about self-employment taxes, and pointed you at a tool to help with mileage deductions. But there’s one more piece of the puzzle that can mean big savings for some web workers: the home office deduction.
Disclaimer: I’m not a tax professional, just someone who’s been self-employed for way too many years and who has read way too many IRS publications (and who has badgered his own accountants for explanations over the years). I’ve done my best to make this guide accurate, but please consult your own tax pro or refer to IRS Publication 587 to be safe.
Regular and exclusive use – The first hurdle you have to jump is that the part of your home you’re deducting has to be in “regular and exclusive use” for your business. Regular means more than just occasional or incidental. Exclusive means that there is a separate, identifiable space that is used only for your business. It doesn’t have to have a door or a partition, but it must be used for business only. If your computer is in the family room with kids running through, that is not a home office – game over.
Pick one of three – Once you’ve got the regular and exclusive use part down, there are three ways a space can qualify as a home office:
1. It’s your principal place of business – that is, where you perform the administrative and managerial tasks necessary to keep your business running.
2. You physically meet with patients, clients, or customers on your premises (no, the IRS has not moved into the Web 2.0 virtual meeting era).
3. It’s a separate free-standing structure. Got your computer set up in a gazebo, garden shed, or barn? You should be good to go.
What to deduct – If your space passes the tests, figure the percentage of your home’s square footage that it occupies. Then split your home expenses into three categories:
1. Direct expenses are those only for the business part of your home, like fixing a leaky roof in the home office. They’re 100% deductible.
2. Indirect expenses are those for keeping up your home in general, like insurance, utilities, and general repairs. They’re deductible according to the percentage of space that the home office takes up. Real estate taxes and mortgage interest fall in this category, too.
3. Unrelated expenses are those for the rest of the house, like painting your kids’ rooms. They’re not deductible.
It’s a bit more complex than that, but those basics cover 90% of what you need to know; Form 8829 will guide you through the calculation.
What about depreciation? – If you own your home, you can claim a deduction for depreciation as well. But be careful: this can turn around and bite you if you ever sell your home in the future. Talk to a tax professional before claiming a depreciation allowance for a home office and understand the potential future consequences.
Finally, note that all of the above applies most directly to those who are self-employed – there are variations on the rules if you’re running a day care center, have a home office but are an employee, or use your home as a storage space for your business. Refer to the IRS publications for the nitty-gritty.