If you are a gigger that is working from home, chances are that you know to claim your business space deduction. But if you have not yet begun to claim your workspace in your taxes, here’s a quickie primer on how to think about your area and the tax deductions it can offer your business.
It’s Pretty Basic
You will have to be sure that your workspace will qualify for IRS consideration. It generally means, meeting three simple criteria:
- It is a legitimate business;
- It is your principal workplace for that business (think, a working space, a meeting space, a place to perform tasks like paperwork, storage, assembly etc.);
- It is a space used regularly and exclusively for business.
That wasn’t so hard now, was it? 😊
Once you know that you have a legit business claim to be levied, you will want to figure out exactly how much space you can claim. Once again, the feds keep it nice and easy on us gig lifers and present us with two ways to think about it.
The Simplified Method
This method is currently capped at $1500 a year, based on $5 a square foot for up to 300 square feet. The IRS may change the amount limited from time to time. It is, as the name implies, simple: you figure out the square footage of your dedicated business space and use it as the guide to your claim.
For example, if your home was 1800 square feet, and your dedicated business area was 200 square feet, it would be 1/9 of the total living area. Using the simple calculation of $5 a foot, you could maximize a claim then of $1000 for your space.
The Regular Deduction Method
The regular method is meant for businesses that have a larger area of business use, or perhaps more detailed deductions occurring throughout the year. In these cases, the simplified method would limit the deductions you can claim and may limit your ability to get the most of your return.
To make a regular deduction claim, the business would look at all direct expenses like paint, wallpaper and supplies that keep their space operational. These expenses would be claimed in full, so 100% recoupable.
The owner would then look more clearly at the percentage of space that the business occupies, compared to the rest of the living environment. So, if when measured, your business space occupied 15% of your total living area, you could claim 15% of all indirect costs: things like power, water, gas, cable, phone and internet…the basic necessities shared by business and personal needs.
The IRS wants you to figure it out using form 8829 (https://www.irs.gov/pub/irs-pdf/f8829.pdf).
Which Is Best?
The quick and simple way to think about which way is going to be best for you, is to think about the size of your dedicated business space. If it is less than 300 square feet, you are likely to save time and effort by using the simplified route and will likely net about the same return.
If, however, your business claims a larger area or has a more detailed kind of involvement in your day to day, using form 8829 is going to be the smarter route.
Happily, form 8829 is pretty simple and easy to complete…so if you are in doubt as to which way will offer you more, simply do the rough math. Complete form 8829 and if your deduction is larger than the minimum allowed by the IRS’s simplified method, go with it. If not, keep it simple.
While you won’t get rich from the tax breaks a home office provides, you know that every penny helps. In this case, you can reclaim some of the costs of doing business, and that simply makes good business sense.
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