Self-Employed and Gig Workers: Should You Claim the Home Office Deduction?
Self-Employed and Gig Workers: Should You Claim
the Home Office Deduction?
The rise of freelancing, self-employed
and gig work is one of the biggest labor stories of the last 20 years. More and
more workers have been looking beyond the normal nine to five and making their
own way in the world, creating an income they can rely on, one that is directly
tied to their skills and abilities. COVID-19 only accelerated this trend.
Working as a freelancer or gig worker can
also open up a world of tax savings possibilities. From retirement plans with
generous contribution limits to health savings accounts to cover the high cost
of private insurance to the ability to write off office supplies and other
essentials, this class of workers enjoys some truly phenomenal tax breaks.
Generous
Deduction or Audit Trap?
One of the most generous of those tax
breaks is also one of the most misunderstood. The home office deduction has
been around for decades, but many freelancers and members of the gig economy
are still afraid to take it.
The idea that simply taking the home
office deduction will trigger an audit is outdated but rooted in historical
fact. In past decades, the home office deduction was widely regarded as a tax
dodge, and the IRS often took a dim view of it.
Times have changed, however, and these
days the home office deduction is no more likely to trigger an audit than any
other business deduction. And while small business owners, including
freelancers who claim their income on Schedule C, are still more likely to be
audited, the overall audit rate is hovering at all-time lows. So should you
take the home office deduction, and how can you tell if you are eligible? Here
are some basic guidelines to go by.
Note:
If
you do find yourself under audit and owe the IRS money for back taxes, don’t
try to fix it on your own! Reach out to our tax resolution firm and we’ll help
you negotiate with the IRS and get tax relief. Contact our CPA, Len Nelms, at www.fairtaxsolutions.com or (470) 305-1233 today!
Exclusive
Use
One of the most important things to keep
in mind is that your home office must be used exclusively for your business.
Many freelancers and small business owners block off a section of their home
and use it exclusively for their business, and that typically qualifies them
for the home office deduction.
You do not have to give up large portions
of your home to claim the home office deduction. Even a part of one room could
qualify as long as it is distinct and separate from the rest of the area. You
could, for instance, partition off a section of a spare bedroom and claim it as
a home office.
Regular
Use
In order to qualify as a home office, the
space you claim must be used regularly as part of your business. If you block
off a room or set of rooms, you cannot go back and forth between business and
personal use.
If you plan to claim the home office
deduction, it is a good idea to keep records of how the space is used. Keeping
a log of the hours you spend there and the business activities you perform can
help you back up the deduction if the IRS comes calling.
Primary
Place of Business
The last part of the qualification
process is the nature of the business and how the home office supports it. In
order to qualify for the home office deduction, the space you designate must
serve as your primary place of business.
That means your home office is where you
meet with clients, where you perform your work and where you complete your
business-related paperwork. If you rent space outside your home or regularly
meet with clients somewhere else, you may not be able to justify the home
office deduction in the event of an audit.
The nature of your business matters as
well. If you work as a freelance writer or website designer, the IRS will
probably not question your home office deduction. But if your primary source of
freelance income is driving for Uber or Lyft, the tax agency may question the
legitimacy of your home office.
Solid
Recordkeeping is Essential
You should not be afraid to take the home
office deduction if you are eligible for it, but you should be ready to back up
your claim if the IRS comes calling. Solid recordkeeping is a must for
freelancers and gig workers claiming a home office deduction, and those records
should be highly detailed and readily available.
Keeping a daily log of your freelance and
gig work activities is a good start. You can keep this log manually or
electronically, but it should be up to date and complete. If you are diligent
with your recordkeeping and eligible for the home office deduction, even a
full-fledged audit could be no big deal.
The home office deduction is widely
misunderstood and underutilized, especially in the age of gig work and
widespread freelancing. If you are eligible for this generous deduction, you
should definitely take it. Working for yourself is hard work, and every tax
break you can get will make your efforts more valuable.
OWE
BACK TAXES?
If you’re going to owe money to the IRS
after filing your return, It’s important to note that only experienced firms
like ours are able to handle tax debt cases since negotiating with the IRS
requires specialized skills that often fall outside of the scope of most
conventional accounting, tax, and tax law firms.
Our firm specializes in tax problem
resolution. We have CPAs, EAs and attorneys who can represent you before the
IRS. We serve clients virtually so don’t hesitate to reach out. If you want an expert tax resolution
specialist who knows how to navigate the IRS maze, reach out to our firm and
we’ll schedule a no-obligation confidential consultation to explain your
options to permanently resolve your tax problem. Contact our firm at (470) 305-1233 for our expert help!
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