Keeping home and work life separate is a challenge for many small business owners and freelancers. Figuring out home-related taxes when the office is steps away from the living room is even harder. Here are the deductions you need to know about if you work from home.
How to calculate a home office deduction
First, double-check whether you can claim your home office at all. The most important criteria is regular, exclusive use. Your office can’t double as your dining room, and it can’t be someplace you only use occasionally. The IRS also specifies that a qualifying home office must be:
- Your principal place of business, or
- Somewhere you meet clients, or
- A separate structure from your home (more on that later)
Once you’re sure that your home office qualifies, you have your choice of two methods to calculate your deduction.
- Determine what percentage of your home your office takes up.
- Follow the Form 8829 instructions to report deductible mortgage interest, insurance, rent, repairs, utilities, and other expenses.
- Multiply the total of these expenses by your home office percentage to determine what portion of the cost is deductible as a business expense.
- If you deducted home office expenses in 2014, dig up your tax return. Enter any carryover expenses (line 42 on last year’s form, or 6a if you used the Simplified Method) on line 24 of this year’s return.
- Calculate the depreciation of your home (the instructions include percentages you can plug in based on what month you started using your home office last year, and whether you completed home additions or improvements).
- Calculate any expenses that need to be carried over to next year’s tax return.
- Multiple square footage of your office by $5.
- Claim up to a maximum of 300 square feet.
Use whichever method you think will result in the larger tax deduction.
Daycare deductions and separate structures
If you run a daycare service from your home, you can still claim a deduction even if you don’t use the space exclusively for the business. Again, first make sure you qualify. You’ll need a license or other certification as a daycare center (or be officially exempt from having one).
Since you probably use your basement or living room for your own family as well as your daycare business, the IRS wants to draw clear lines between business and personal use. After you calculate the percentage of home daycare space on Form 8829, you’ll also report the hours of the year that you operate the business.
Some business owners may also use a separate building on their property. Think of a florist’s greenhouse, an artist’s studio, or even a detached shed where you store inventory or supplies. You can deduct expenses for these kinds of separate structures even if you don’t use them as a principal place of business.
Getting down to business deductions
The finance gorilla reminds you that you can probably deduct your new iPad… as long as less than 50% of the time is spent playing Clash of Clans. By m.c.plus.designs for matthew_dann2003.
The IRS allows you to claim “ordinary and necessary” expenses related to your business. Don’t be intimidated by the word “necessary.” It means the expense should be common, helpful, and appropriate for the kind of work you’re doing. It’s perfectly reasonable to claim a rug for your office as a “necessary” expense, even if your business won’t collapse without it.
Some common items to deduct include:
- Office supplies like paper, planners, staples, etc.
- Desk, chairs, filing cabinets, rugs
- Computer, printer, scanner (you may have to prove these are for business use more than 50% of the time)
- Phone line (if you have a separate line for your business)
You may also be able to deduct some design services! “Reasonable advertising expenses” are deductible, so talk to your accountant about your car wrap and new business cards. If your business is new, some design services may be classified as start-up costs, which are usually treated as capital expenses. You may still be able to amortize some of the costs. Your tax advisor can help with your specific details.
Tax info for work-at-home parents
Many small business owners and freelancers perform the daredevil balancing act of parenting and working from home. Childcare is a crucial tool for most working parents to get the job done.
You may be responsible for withholding and paying social security, Medicare, and federal unemployment taxes if you hire a nanny or sitter. Page 4 of the Household Employer’s Tax Guide features two tables with the information you need to withhold the right amount of taxes and keep appropriate records.
If you pay someone to care for your children or other dependents, you may be eligible for a tax deduction. The Child and Dependent Care Expenses credit lets you claim up to $3,000 for one qualifying person and $6,000 for two or more. A qualifying person is a child under 13 years old, or a dependent living with you who can’t care for him- or herself.
To claim the credit, you must be paying for care in order to work or look for work. The babysitter’s fee for a night out with your spouse doesn’t count. The wages you pay the nanny while you ship orders do. Tally up work expenses and deduct reimbursed expenses on Form 1040, 1040A, or 1040NR. As always, file your records carefully for future years.
The IRS offers a lot of ways for home workers to claim deductions and credits on their tax return. Filling out some extra paperwork is worth it to avoid paying too much in taxes this year.