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VOLUME 4RTax Write-Offs for Self-Employed Renters By Nikki Davidson When tax season comes around for homeowners, mortgage interest, property taxes and home upgrades are all hot topics. But for renters who have no permanent investment in the property, it may not be the first thing on their minds. However, self-employed tenants may be eligible to earn a sizable tax write-off.
The self-employed industry has boomed since the COVID-19 pandemic. Bloomberg analyzed data provided by the Bureau of Labor Statistics and revealed that 1.4 million people joined the guesstimated 15.4 million self-employed workforce in the last two years. The U.S. now has the highest number of independent workers since 2008—16.8 million workers as of June 2022.
This job trend could be a game-changer for self-employed workers in Florida and Texas amid skyrocketing rent and cost-of-living increases. According to research spearheaded by Florida Atlantic University, many of the Sunshine State's metro areas appear on the top-10 list of the highest year-over-year rent increases.
However, independent workers must be cautious about following tax laws perfectly when filing this deduction so their claims can stand up against an audit. The Internal Revenue Service has strict rules about if and when workers can make a home office deduction. Work From Home Tax Deductions A home office tax write-off can quickly amount to big money when all expenses are calculated. While business expenses cannot exceed total income, the costs associated with running a business in a rental home can heavily affect a renter's bottom line. Many of these deductions aren't as simple as they seem, and independent workers must carefully calculate which savings they're entitled to receive.
Home OfficeTo claim a rental space as a home office, the IRS dictates it must be regularly and exclusively used for business activities by self-employed people such as freelancers, contractors or sole proprietors. It'll also need to be the principal location of the renter's workday. If workers are employed by a company while at home and receive a W-2 tax form, they are classified as an employee. Therefore, they are not eligible for a home office deduction.
A home office doesn't necessarily need to be a separate room. However, it can be more challenging to claim a home office in the same space where a renter conducts daily personal activities, or hobbies. Renters must use the space only for work. If self-employed workers complete virtual client calls on their couch but use that same area for their afternoon naps, it's not a write-off.
The most solid tax claim for a home office is one that's in a separate room or corner of a living space that is out of the way of everyday living activities. This work area doesn't need to be passed through to get to another room and/or includes an appliance or equipment that’s not for personal use. Rental Insurance and Utilities Many bills that come with living in a rented space can be write-offs as long as self-employed workers can prove that they pertain to a renter's typical business operations. Expenses like rental insurance, heating and electricity can be applied, but only for the portion of the rental that the home office exists in. While most utilities will fit in this category, not all will. For example, if a renter's business is solely electronic and produces no waste, that worker wouldn't be able to justify writing off a trash collection fee. Wi-Fi, Internet and Other Technology Self-employed workers who rely on an internet connection, phone or fax machine can write off some of these monthly expenses. However, they'll need to calculate what portion of their usage of these tools is for business purposes.
If they're surfing the internet after they've finished their workday, workers can't write off that time. To make a proper calculation, they can log work hours and calculate what portion of their day these tools are used for work. Furniture A desk, computer chair, shelves and other accessories are all eligible for a tax write-off as long as they are used exclusively for business. If a renter uses one surface, such as a desk, during the workday and also uses it as a dinner table after hours, it is no longer eligible. Receipts or Proof Needed For a Tax Write-Off A home office tax deduction hinges on proper documentation. Renters must keep their receipts to get the most out of tax season. They should record how much they paid their landlord each month, bills to their local municipality for utility services, and log expenses for tools and technology.
Renters have two choices of how they'd like to file their home office deductions. They can make a standard deduction by measuring the square footage of their home office space and dividing the office area by the area of their rental. If a renter lives in a 1,200-square-foot rental and the office is 300 square feet, it would be 25% of the home. They could deduct 25% of their rent, insurance and utilities on their taxes.
A second option allows a self-employed renter to bypass the nitty gritty of specific deductions and use a simplified option that the IRS created to streamline the process. The IRS allows renters to make a standard deduction of $5 per square foot of home used for business, up to 300 square feet. The maximum deduction of $1,500 is the only home office deduction a worker can make on that year’s tax form.
A Form 8829, "Expenses for Business Use of Your Home," can help a renter determine what they can write off. Renters will then report these expenses on Form 1040, Schedule C, Line 30. Red Flag Write-Offs, Audit RiskWhen writing off expenses for a home office, renters should be ready to respond to an audit and keep records to prove the information they report on their tax forms. Renters who claim most of their rental space as a home office or a home office for a profession that doesn't typically require a traditional office space may be more likely to face an audit.
The IRS also frequently investigates self-employed workers who claim their business expenses equal their total income. For the 2019 tax season, the agency reported that 1.1% of self-employed workers who don't report any positive income are audited compared to just .2% of people who report an income of $25,000 to $500,000.
Working from home comes with extra expenses, and taxpayers deserve to get credit for the money they spend on their business. Financial education and detailed record keeping will go a long way in ensuring that Uncle Sam doesn't take too much money from the self-employed renter.