Many remote employees are set to miss out on home office expenses deductions this tax season, a change instituted by the Tax Cuts and Jobs Act in 2018. However, this restriction does not apply to those classed as fully self-employed, those running a side business, and freelancers whose primary place of work is their home. The deductions are only applicable for home offices that are "ordinary and necessary" for the business, regularly and exclusively used for business purposes - meaning it cannot share its function with, for instance, a craft room or a guest bedroom. A divider could potentially be used to separate a room, in this case.
Documentation is important, argues Crystal Stranger, CEO of Optic Tax. She recommends keeping photos or blueprints of your home pinpointing the dedicated home office location for future reference in the event of an audit.
Self-employed workers can deduct indirect expenses that aid in maintaining their home using the actual expense method. Still, this can only be done to a degree – the percentage deductible corresponds to the proportion of the home used as an office. For example, if the home office occupies a tenth of the total home area, 10% of mortgage payments and electricity costs could be deducted.
It's worth noting that direct expenses are also deductible, if solely for the office. These might include items like a computer monitor, or a renovation specific to the home office, explains author and attorney Stephen Fishman. It's important, however, to ensure that these total deductions do not exceed the company's profit.
Fishman also brings attention to the simplified home office deduction, a method wherein a self-employed individual can deduct $5 per square foot of office space, to a maximum of $1,500. This often results in a lesser deduction, but provides a more straightforward route for those who haven't made significant office additions in that year.