8 Tax-Deductible Ways to Make Your Home Office Great
The 9-to-5 office job may be on its last legs. Cause of death? Flexible hours, the gig economy and the rise of working from home. About 24 percent of employed people did some or all of their work at home in 2015, according to the American Time Use Survey (ATUS) from the Bureau of Labor Statistics. That’s an increase from 19 percent in 2003, the first year the ATUS collected data.
Whether you’re a full-time remote worker or getting ready to start your own business, you need a workspace that’ll keep you motivated — and save you money. Here’s how to plan and execute a home office that will boost your productivity… and then deduct it on your taxes.
1. Choose a dedicated space.
It’s important that whatever space you choose for your home office doesn’t do “double duty” as a playroom, second living room, guest room or anything else. In order to simplify deductions and avoid IRS audits, the room or area should be used “exclusively and regularly” for your business, says Lisa Greene-Lewis, CPA and tax expert for TurboTax.
2. Minimize distractions.
To maximize efficiency, orient yourself so you won’t be able to make eye contact with other people in the house walking past your office, says Peggy Duncan, personal productivity expert. That means your desk should be facing away from the door. Toggling between tasks can also slow your work momentum, so consider investing in a second computer monitor (it’s deductible!) so that you can keep your inbox and calendar open at the same time, see two different views of a PowerPoint presentation you’re preparing, and so on.
3. Make it user-friendly.
It’s your space, so the only user that matters is you. And telecommuters will attest that if you don’t like your space, you’ll end up working from the kitchen table, bed, or somewhere else where you’re not as likely to get as much done. Making your office — or space — somewhere you want to be will increase your productivity.
If you’ll be seeing clients, make sure there’s a meeting-friendly area, whether it’s seating and a table off to the side, or chairs in front of your desk. And invest in whatever technology you need to be efficient at your job, whether that’s a scanner or a high-quality webcam.
4. Minimize clutter.
Clutter is the enemy of productivity, so make sure the room only houses the essentials. You’ll also want to make sure most things that you frequently use are at your fingertips, but that a few are far enough away that you have to get up to reach them. “When you’re working in a home office, you can get comfortable and sit for hours and not realize it,” says Duncan. Sitting still might be good for your financial bottom line, but it’s not good for your other bottom. And that’s not good for your long-term health.
5. Keep good records.
Hand-in-hand with minimizing clutter, every productive home office needs a good paper-management system. “Everything needs a home,” says Duncan, so there shouldn’t be loose papers on your desk unless you’re currently working on them. She suggests a stackable tray on or near your desk with clear plastic folders for your projects and tabs denoting each one. You can also include folders for things you need to do today, tasks you can complete tomorrow and long-term projects.
You should also have one folder for "Deductions." In it, drop receipts for furniture, invoices for office-specific construction/design/painting work, electronics, electronic repairs, and other deductible purchases. And set up another folder for “Home Expenses” like mortgage interest, real estate taxes, utility bills, and landscaping fees. (More on that in a moment.)
6. Set your hours based on your productivity.
You’ll know your home office is working like a charm when your revenues rise. One way to do that is to schedule your time in it based on “what’s closest to the money,” as Duncan puts it. Give your attention to what you’re immediately getting paid to do first, then turn your attention to the projects that are likely to increase revenue in the future, before turning to the other items on your to-do list.
7. Learn the rules of deductions...
When you take the home office deduction on your taxes, there are two types of expenses — direct and indirect, says Don Zidik, CPA with Marcum, LLP. Direct expenses are those that can be traced, 100 percent, to the home office. This list might include office-exclusive furniture, lighting, painting, electronics, and so on. Indirect expenses, by contrast, are those that are only partly allocable to your home office — for instance, utility bills, mortgage interest, and real estate taxes.
When it comes to the latter, you (or your tax pro) will need to determine the percentage of the home’s square footage devoted to the home office, then multiply that by the indirect expenses you’re deducting. This all goes on tax form 8829. For anything you use exclusively for business, you can deduct the entire amount if you use it more than 50 percent of the time for your business, or if it cost less than $2,500; if it’s more than $2,500 and you use it less than 50 percent of the time for your business, it has to be depreciated.
Tax software will prompt you on how to do this.
8. ...Or take the easy route.
The alternative is to take the home office deduction “simplified option,” which was put in place a few years ago. You take the square footage of your home office and multiply it by 5 (for $5 per square foot). This allows you to take a deduction of up to a $1,500 (that is, you can deduct up to 300 square feet of home office space). Know that keeping track of bills and receipts and itemizing might allow you to deduct more, says Greene-Lewis, since home mortgage and property taxes can be high and you’re able to deduct a percentage of that.
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