The Home Office Expenses Deduction Guide for Employee
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It is time for everyone to file their yearly taxes, and this can sometimes become a huge hassle if you don't know the correct way to do it. However, if you're a home office worker or an entrepreneur, we have fantastic news. You may be able to qualify for a considerable deduction on your taxes, but you first have to meet certain criteria.
Anyone who uses part of their home for business-related inquiries could qualify to write off some expenses they've made over the year. If you want to know more about this, don't hesitate to keep reading and find out how to deduct your home office expenses.
What Are Home Office Expenses?
Home office expenses are those costs that you make for exclusively business purposes. They allow you to reduce the final amount you pay on your taxes or mortgages in your annual tax return. However, only the expenses done exclusively for your business can be deducted. Some of the most common home office expenses are related to buying the equipment, maintenance, and different supplies to use in your home office setup, such as an office chair or desk.
Which Home Office Expenses Can Be Deducted?
Keep in mind that not all expenses can be deducted, but there are several ones that you can use to reduce your tax payments. Some of them are the following.
Home Office Deduction
The home office deduction refers to the physical workspace you work in. It can be either rented or owned, and its cost can be deducted from your yearly taxes. However, calculating this can be pretty tricky. You're going to need the exact measurements of your home office and submit them in a diagram so that the IRS agent can verify the information.
Then, you may get a certain percentage off based on the measurements you submitted. Moreover, this can also be used to reduce other expenses, such as your mortgage, electricity, and other services that you would need to register in your tax payments.
Internet and Phone Bills Deduction
Another typical expense that can be deducted is your phone and internet bill. This applies to those people that do most of their job online. Moreover, if you have a website or a special phone line that you only use for your business, you can deduct those expenses from the final cost. This is especially true if you tend to do long-distance phone calls for your business, as these tend to be quite expensive.
Health Insurance Premiums Deduction
Self-employed people usually need to pay for their own health insurance premiums, especially if they're unmarried or can't get coverage through their spouses' jobs. If that's the case, you can deduct your health long-term care insurance premiums from your taxes. Moreover, you can also deduct your spouse's and children's premiums, even if they're not dependent on you.
This may sound weird to some people, but there are certain circumstances in which your meals can be home office tax deductibles. Some of these situations are the following:
- On a business trip
- If you're hosting a conference
- In meetings with clients
However, keep in mind that the meal can't be too expensive or extravagant, and until the end of 2022, you can deduct 100% of all meals, as long as they come from a restaurant and you keep your receipts. You can only deduct 50% of the price in any other circumstances.
Although it would be fantastic, you can't deduct your daily meals, even if you eat them during working hours.
You need to meet several requirements for a business trip to qualify as a home office tax deduction, such as needing to rest at a hotel and lasting more than a regular workday. However, the most important requirement is that the trip's purpose must be exclusively dedicated to your business, such as meeting a client, hiring new staff, or even receiving training.
We know that business trips tend to be pretty expensive, and that's why you need to keep all of your receipts, including the following 100% deductible expenses.
- Transportation fees
Nevertheless, things tend to get complicated if you start mixing business with tourism, as you can only deduct the business part of your trip. This is also the case if someone who's not an employee decides to join you. They must take care of their entire work from home expensess once they need to file their taxes.
Vehicle Use Deduction
If you use your car to make business-related inquiries, you can also deduct some tax expenses. All you have to do is calculate the number of business miles you drive, the dates you drive them, and multiply those miles by the standard mileage rate. After doing that, you're going to be left with the amount of money you can deduct from your taxes.
However, there's a much more complicated method, in which you add up the entire expenses of your car and then calculate how much time you spent using it for work-related issues. Then, you may deduct that percentage of time from the total car expenses.
Our recommendation is to use both ways and select the one that saves you the most money.
Another common work from home expenses that most taxpayers deduct is business loans interests as long as the loan isn't used for personal purposes. This also applies to credit card interests, but you must be responsible and try to only spend the money you have, as a work from home tax deduction isn't going to magically give back all the money you spent.
However, this option is still fantastic for businesses with trouble being sustainable and could use some extra financial help.
Publications and Subscriptions Deduction
If you're subscribed to any specialized magazines or journals that cater to your business' niche and can be used as an educational item, you can deduct those expenses. A good example of this would be if you're a programmer and you're subscribing to a coding magazine.
This deduction can be compared to the previous one, but in this case, it applies to all the education expenses you make so that you can improve your skills for your business. However, it doesn't apply to classes meant to teach you a skill that cannot be used in your business.
Business Insurance Deduction
If you pay premiums for insurance for your business, you can also deduct those expenses. Whether it is a fire, credit, vehicle, or liability insurance, you can keep your business safe while deducting it from your yearly taxes.
Remember that protecting your property and business is crucial if you don't want to lose money, and this benefit could help you decide to buy insurance coverage to help you with that.
Some people don't own a house and decide to rent a property instead. If this is the case, and your home office is on this property, you can deduct the rent expenses from your yearly taxes. Moreover, if you need to rent any other equipment, such as a home standing desk, or any other home office essential, you can also get those fees deducted.
However, this isn't possible to do if you own the property. In addition, you need to make sure that the rent is reasonable, as prices that fall outside of the norm may make people suspect you're committing fraud.
Startup Costs Deduction
This is a fantastic perk for people who want to start a business, as the IRS allows new business owners to deduct up to $5,000 of startup costs during their first active trading year. These expenses cover the market research you have to do before creating a business, travel expenses, advertising, legal fees, and many other costs that happen when you first open a business.
Moreover, if you open an LLC, you can deduct $5,000 more due to organizational costs. However, remember that legal fees, travel expenses, and other professional costs are always deductible, even if they're not considered startup costs anymore.
Nonetheless, other expenses such as buying materials and stocking your businesses aren't considered startup costs, but they can still be deducted.
Finally, the last deductible expense on this list is related to all types of advertisements you may do for your business, such as Facebook or Instagram ads, an interview in a magazine, a TV commercial, or even a billboard.
This rule even applies to ads meant to promote donating to a charity as long as you write the name of your business somewhere in the ad.
Guide for Home Office Expense Deduction
Although you now know which home office expenses you can deduct from your taxes, there's still a long path ahead. Doing our taxes is a tricky job, and on occasion, we must even hire accountants to help us do it properly. However, the following guide is meant to help you understand better how to make your home office deductions and hopefully save some money.
Who Can Take the Home Office Deduction?
Any self-employed person who has some sort of space uniquely dedicated for doing business-related activities in their home can claim the home office deduction. It doesn't matter the type of home or whether they own or rent it. However, it can't be a temporary home such as a hotel.
Still, this structure must meet the following two criteria.
Regular and Exclusive Use
The first rule that must be met is the regular and exclusive use rule. This means that the room you use for your business activities can't be used for any other activities. However, the only two exceptions are the following.
- If you provide daycare services and are properly licensed by your state, you can still be eligible for tax deductions.
- When the office is used to store inventory, it is still eligible, as you're using it for something directly related to your business.
Principal Place of Business
You must do the majority of your work in your home office workspace. However, this doesn't mean you can't do other parts of your job in other places. Suppose you're a taxi driver or a contractor. In that case, it is logical that you're going to be doing the majority of your actual job somewhere else. However, you can still qualify to receive deductions if you do your business management and administrative activities in your office.
How to Calculate Your Home Office Deductions
There are two main ways to calculate your home office deductions, and they're popularly known as "the easy and the hard way." Nonetheless, you must know both methods to always get the most significant deduction.
The Actual Expenses Method
The actual expenses method is "the hard way," but it ensures that you deduct 100% of your work-related expenses. In order to do this, you need to add up all the direct expenses you made throughout your year and show evidence to back it up.
However, it also helps you deduct indirect expenses, such as your mortgage, utilities, etc. This may be calculated a bit differently, as you need to determine which percentage of your home is occupied by your office. Then, you can deduct that percentage from your mortgage interest and services like electricity and internet.
The Simplified Version
The simplified version is relatively straightforward, and it works better for small offices that don't take too much space. It consists of gaining a deduction of $5 per square foot as long as your office is less than 300 square feet. This allows you to deduct up to $1,500 from your taxes.
Most people with small home offices choose this method to avoid the hassle of gathering receipts and evidence to use the actual expenses method.
Doing our taxes doesn't have to be complicated. Still, we must be aware of everything we do and keep a thorough record of all the transactions we make throughout the year, especially if we're self-employed and wish to enjoy our home office expense deductions.
However, after reading this article, you're more than ready to tackle those taxes and save money. Moreover, if you're looking to upgrade your home office, don't hesitate to check out our fantastic office desk accessories on our website.
We build office products to help you work smarter.
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