The Home Office Deduction for the Self Employed

Working as an independent contractor provides many tax advantages when things are done properly. Among those advantages is the ability to utilize a far greater number of deductions to reduce your taxes, including the home office deduction.

If you’ve ever heard
of the home office deduction being a “red flag” to the IRS, you’re not alone. This simply isn’t true, and as long as you qualify to take the home office deduction, you should take it. After all, a qualifying home office can allow you to convert a portion of many otherwise personal expenses into tax savings.

The IRS has rules set to determine those that qualify for the home office deduction. Home office expenses can only be deducted when a “specific area of your home” is used regularly and exclusively as your principal place of business. It can be a room in your home, or space specifically designated to run your business. This area can be used for paying bills, billing clients, and general management of your business, in addition to using it to perform the duties of your occupation.

Most independent contractors can qualify for the home office deduction, and once you determine you do, you then have to decide which route to go, as there are two methods in which to take the deduction.

 

Simplified home office deduction

The “simplified” home office deduction is made to be simple. You take $5 per square foot of your home office (up to 300 sq. ft.), for your deduction. So if your home office is 100 sq. ft. your deduction would be $500 dollars for the year, or $41.67 per month. This method is usually not the most tax advantageous, as it doesn’t include your other expenses associated with your home that you are able to deduct a portion of.

 

The standard home office deduction

The standard method requires a little more work and calculation, but the tax benefits are worth the effort. To calculate the “business use percentage” of your home office, you divide the square footage of the area devoted to your home office by the total square footage of the home. Then, simply multiply the total of your various home related expenses by the business use percentage to determine the amount to be deducted.

Example:

As you can see this is clearly more beneficial than the simplified deduction listed above, and totals to an average of $1224 for the year, for the home office deduction. This is the method we recommend to clients, as it is almost always more advantageous to use this method.

 

Home expenses to include:

This is where the home office deduction really comes in handy. Because a portion of your home is devoted to business, the percentage you worked out earlier can be used to deduct from various home expenses that would normally be nondeductible.

-Rent or depreciation of your home

-Gas

-Electricity

-Water

-Garbage

-Maid service (if you pay with cash, be sure to get a receipt)

-HOA fee

-Alarm or security service

-Home owners insurance

-Sewer

-Mortgage loan interest

Other expenses:

Money spent to repair, maintain or remodel your home office is deductible. For example: If you paint the walls in your home office, or put new floors in, the cost of that expense is fully deductible.

At Independent Contractor Tax Advisors, we ensure you are taking full advantage of the deductions and tax reducing strategies available, arming you with the knowledge and expertise to confidently face the tax man. Contact us today for your free tax consultation with one of our knowledgeable tax advisors.

 

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Tags: business, corp to corp, deductions, self-employed