During the shift to remote work because of the Covid-19 pandemic, many have been disappointed to learn that the Tax Cuts and Jobs Act of 2017 eliminated the home office tax deduction for employees (anyone who receives a W-2).
However, these tax breaks still exist. So long as you have self-employment income, you'll be able to deduct home office expenses from your 2020 taxes. Find out which home office expenses freelancers and entrepreneurs can deduct, and how to track these costs to maximize your small business tax savings.
How to Qualify for the Home Office Tax Deduction
To take the home office deduction, freelancers will need to have an area of their home that is dedicated to conducting business--and they'll need to work there regularly. This means that working from your kitchen table won't qualify. The best way for freelancers to meet the requirement is to designate a workspace that won't be used for personal reasons.
Keep in mind, your home office does not need to be a full room--nor does it need to be separated by permanent physical barriers. Your home office could be the five feet around your desk and office chair, the room where you meet with clients, or the sound-proof closet where you record your podcast. So long as you use the area exclusively and regularly for business, it will qualify.
Which Expenses Can Freelancers Deduct While Working From Home?
Freelancers and entrepreneurs can calculate the home office deduction in one of two ways:
- The simplified method involves taking a prescribed deduction based on the size of your home office. You can deduct $5 per square foot up to 300 square feet, making the maximum deduction $1,500 for this method.
- The actual-expense method allows you to deduct individual expenses associated with your business or home office. Generally speaking, if your home office costs exceed $1,500, you'll want to use the actual expense method.
Under the actual-expense method, direct expenses--those that are used exclusively for business or in your home office--can be deducted in full. If you set up a home office this year during the mandated Covid-19 lockdown, you can deduct the cost of all your new furniture, equipment, and décor. Specific examples of direct expenses include:
- Computer or laptop
- Noise-canceling headphones used only for work
- Office chair
- A business phone line
- Repairs and maintenance for your home office, including new paint
- Desk lamp
- Art and décor (so long as these items remain in your home office)
On the other hand, indirect expenses like your mortgage and utilities are treated differently. You'll be able to deduct only a percentage of your indirect expenses based on the portion of your home that is used for business. For example, if your home office takes up 200 square feet of your 2,000-square-foot house, you'll be able to deduct 10 percent of your indirect expenses. Indirect expenses include:
- Mortgage interest
- Property taxes
- Insurance premiums
- Homeowners' association fees
- Security system costs
- General home maintenance
Keep Good Records of Your Deductions
To choose the home office deduction method that maximizes your savings, you'll need good records. Use a spreadsheet or accounting software to track expenses such as office equipment, home repairs, utilities, insurance, and mortgage interest payments. If you've invested in significant improvements to your home office, make sure to keep receipts for all your purchases and repairs.
Start Saving With the Home Office Deduction
The home office deduction can mean a big tax break for entrepreneurs and freelancers who've spent hundreds on new office equipment while working from home in 2020. Remember to start tracking your expenses now so you can take advantage of these savings when you file your next tax return.