If you are a freelancer who works in a designated section of your home, you may be eligible to claim a home office deduction from your taxes. There are a large number of expenses you can claim and methods for calculating your deductions for your home office...but what are the limits? Depending on what method you select, there will be certain limits.
In this article, we'll go over the home office deduction limitation for how much you can deduct from your taxes. First, let's review the different methods for claiming this tax break.
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If you want to claim the home office deduction, you'd need to meet certain requirements. Just because you work from home sometimes, does not mean you qualify for this tax credit.
Your home office must:
To help you determine if your home office qualifies as a principal place of business, you'll need to look at this list of activities that count:
If you qualify, you can follow these Form 8829 instructions to claim a home office deduction.
It's fairly easy to calculate the Simplified method for a home office deduction. Instead of keeping track of all your home office expenses, you can just measure the size of your designated home office space.
In 2021, the home office you are able to claim $5 per square foot of home office space with a limit of 300 square feet. So, the maximum deduction you can claim if you use the simplified method is $1,500 per year. It should be noted that if you claim home office deductions using this method, you do not need to organize and categorize your expenses.
You'll just need to measure the square footage of your home office in which you use as your principal place of business and exclusively for business. We'll explain more about this in the next section.
If you don't want to save and categorize your receipts, this deduction method may be the option for you. Be warned, however, business owners typically save more money recording receipts as it leads to a larger deduction.
When you elect to take this method, you cannot deduct any depreciation or section 179 expense for the space being used as the home office.
Actual expenses not related to your home office can still be deducted such as marketing, supplies, or equipment expenses.
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In order to calculate your home office's actual expenses, you'll need to track qualifying business expenses. Here are some guidelines to follow in order to help you understand if an expense counts as a write-off by using the regular method.
The IRS has some requirements for deductible home office expenses. There are three general questions you could ask yourself to determine if expenses qualify as tax write-offs.
A space doesn't have to be the only place where you work. You can do administrative tasks or activities your business. For example, if you are a contract therapist.
If you have to visit client's homes to perform your sessions but you do administrative activities at your home office, you can still qualify for the home office deduction.
Remember, tracking receipts deducting actual expenses often lead to a greater deduction. Try our free home office deduction expense sheet to track your expenses.
Remember, in order to claim business deductions, expenses need to be related to your business. Here is a list of common allowable office-based deductions you can claim in full on a Schedule A.
Certain expenses can only be used to the extent of your business income.
Be warned that if you claim too many tax deductions, you could trigger an IRS tax audit.
You see, the IRS has an automated system that looks out for red flags in order to catch tax fraud. Every tax return is compared to other taxpayers who have similar tax profiles i.e. professions.
For example, let's say the average person in your profession deducts 6% of their income for travel expenses. If you deduct 25% of your income to travel expenses, this will likely get you audited.
There's a lot of talk about an audit risk for the home office deduction. This is because many small business owners tried to take advantage of this tax write-off when it was first introduced.
Many self-employed folks, even those who do legitimately work at home, do not have a specific, exclusive area that is used solely for business.
You cannot claim more than the gross income of your business in a tax year. For instance, if your gross income is $7,000, then you cannot deduct $9,000 as home office expense. So, your business income can be a deduction limit.
All you really have to do in order to stay safe is have reasonable and well-documented records of your home office expenses. If you are an employee, you cannot claim a home office deduction.
Just because an office building closes, does not mean you qualify for this tax break.
Let's say you work a full-time job and you started freelancing at the end of the year. You'll file a W2 along with your 1099. How do you write off home office expense deductions?
Well, if this is the case, the home office expenses would be divvied up by the portion that you were self-employed. For example, let's say you figured out how to get freelance writing clients in October.
The home office expenses would be calculated by using your 3 months of work if you used the simplified home office method. So, if you claim a 200 square foot office, that multiplied by the IRS rate is $1000.
Since you worked for 3 months as a freelancer from home, then you would only be eligible to deduct $250.
A home office reimbursement has its limitations. However, as long as you don't try to take advantage of this tax break and maintain good records, you won't get in trouble with the IRS at the end of the tax year.
If you need help maintaining clean records for the IRS, try Bonsai Tax. Our app will scan your bank/ credit card statements to discover potential tax write-offs and help you maximize your deductions at the end of the tax year.
You won't need to store or hoard your tax receipts because Bonsai Tax will do it all for you. Users typically save $5,600 by using our app. See how much you'll save by trying a 7-day free trial here.
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