Are you leaving $500 on the table? You might be.
In my recent interview with Stephen Fishman, I asked him about the most common tax deductions that independent contractors get wrong. He said, “One great deduction that people don’t take or are afraid to take is the home office deduction, which if you are a renter can be worth a great deal because ordinarily you can’t deduct your rent at all. If you live in an expensive area like the bay area, that can be a lot of money.” So let’s take a look at Fishman’s article, The Home Office Tax Deduction, and discover how to use it and how much we can save.
Disclaimer: I am not a CPA (certified public accountant); I don’t even play one on television. Please do not consider this certified legal advice.
Wait a minute, am I even eligible?
The home office deduction is available to renters and homeowners alike. It is available for office space and other areas you use for business in your home — such as a studio, workshop, or garage. And according to the IRS, your “home” can be a house, condo, or apartment unit — or even a mobile home or boat, as long as you can cook and sleep there. However, you must meet two tax law requirements to qualify for the home office deduction:
Requirement #1: Regular and exclusive use. You must regularly use part of your home exclusively for a trade or business.
Regular is easy. This just means that you are working from home a couple of days a week or a few hours a day.
Exclusive is a little harder. How many of us use our computer exclusively for work? Well, maybe Harry Mack. But besides him, no one! Don’t worry. The important thing is where you use your computer.
The best way to handle this is to have a room that is dedicated to business. Guess what? I don’t. As an alternative, make sure that your work area is clearly defined. Put up a room divider, for example. Fishman offers a few more tips to establish your legal right to deduct for a home office.
- Document it. Photograph you home office and draw a diagram showing where it is located.
- Have your business mail sent to your home. Duh.
- Keep track of the time you spent working at home. This is easy. Just add these times to your calendar and keep them for…ever.
I know it feels like we’re barely squeaking by, but trust me: we’re going to make it. I’ve been taking this deduction for years and it’s worked out fine. Based on other articles that I’ve read, as long as you are faithful to the spirit of the requirements, the IRS will accept it. Basically, treat your home office like you would a corporate office. You don’t have to rush out of the room every time you get a personal phone call, but you also can’t hold jello wrestling matches there. Unless, of course, that can be considered managing your business. If so, congratulations, and are you hiring? #livingthedream #jobplease
The home office deduction is only available to you if you are running what Fishman calls “a bona fide business.” Don’t worry, if you’re charging for your services and making money, not just helping friends for fun, then you qualify. Still worried? Read How To prove Your Hobby Is A Business.
Requirement #2: You must also be able to show that you use your home as your principal place of business.
Your home automatically qualifies as your principal place of business if both of the following are true:
- You conduct the administrative or management activities of your business from home.
- You have no other fixed location where you conduct those activities.
Both statements are true for most sound engineers. We seek out gigs, invoice clients, and generally TCOB from home, then head out to the concert venue, theatre, or hotel to make ears drums bleed. I think this requirement is mostly to keep people from claiming their office space AND their home office. So if you own an AV company and manage your work from the warehouse, tough titty.
How Much Money??
Using the simplified deduction option, which most of us will, you can deduct $5 per square foot with a maximum of 300 square feet. So if your office occupies a 10’x10’ square, you can deduct $500. Boom.
It could be less, but it could be more. If you don’t use the simplified deduction option then you will need to answer a list of questions about your home office. This year I got a home office tax deduction of about $5,000. Why? Mostly because of the high cost of living in the bay area. I was paying $1,000/month for a triangle-shaped one bedroom, and using almost half of it as a home office.
Many people don’t take the home office deduction because they don’t understand it. Now you do. And you should, because while it is not completely defined, most freelance sound engineers meet the eligibility requirements and you could save a bundle.