Utilizing the Home Office Deduction for Authors
by Susan Watts
As an author, your home office is not just a space for work; it's your sanctuary, your creative haven where the magic of storytelling unfolds. But did you know that your home office could also provide financial benefits in the form of tax deductions on your individual US Federal tax return?
The home office deduction allows you to claim a portion of your housing costs as business expenses on your tax return, potentially reducing your tax liability. In this blog, we'll explore how authors can leverage the home office deduction to their advantage, including using it to store inventory.
Defining the Home Office Deduction
The home office deduction is available to self-employed individuals, including authors, who use a portion of their home exclusively and regularly for business purposes. To qualify for this tax benefit, your home office must meet two primary criteria.
1. Exclusivity
You must use the area claimed as a home office exclusively for business activities. The space doesn’t have to be marked off by a permanent partition, it can be any separate area. However, it’s important to note that you cannot use the space for any personal purposes. For example, the regular use of the kitchen table cannot be considered a qualifying location, as it is not exclusively dedicated to business. However, a desk in a corner of a room could qualify if used exclusively for work.
You should ensure that only business-related items occupy the space designated for your home office. For instance, if your home office doubles as a guest bedroom, you can only claim the part of the room that is dedicated to your business as home office expenses. Even personal belongings like children’s toys can disqualify the area.
2. Regular Use
Your home office space should be regularly used for conducting business. Occasional or sporadic use may not qualify, even if the space serves no other purpose. If you don’t have any other primary places of business, this test is generally not an issue.
What expenses can you deduct?
Once you determine that your home office meets the eligibility criteria, you can deduct a portion of various expenses related to your home. These may include:
- Utilities: You can deduct a portion of your utility bills, like electricity, heating, and water, depending on the percentage of your home used for business.
- Rent or Mortgage Interest: If you're a renter, a portion of your rent is deductible. Homeowners can deduct a portion of their mortgage interest, homeowner’s insurance, property taxes, and depreciation. Depreciation is an allowance for the wear and tear on the business part of your home. Depending on your situation, the depreciation expense claimed in prior years may be required to be reported as a taxable gain in the year you sell your home.
- Repairs and Maintenance: Expenses for repairing and maintaining the portion of your home used for business are deductible. This includes costs like painting, repairing the roof, or fixing plumbing issues.
- Office Supplies and Equipment: You can deduct any supplies or equipment purchased for your home office, such as desks, chairs, computers, and stationery, as business expenses.
Using the Home Office Deduction to Store Inventory
For authors who self-publish or maintain inventory of their books, the home office deduction can also extend to storage space within the home. If you store inventory, such as books, manuscripts, or promotional materials, in your home office or in a designated storage area within your home, you may be able to deduct a portion of your home-related expenses associated with that space without meeting the exclusive use test.
To claim a home office deduction for storage, you must meet all the following tests:
- You sell products at wholesale or retail as your trade or business.
- You keep the inventory or product samples in your home for use in your trade or business.
- Your home is the only fixed location of your trade or business.
- You use the storage space regularly.
- The space you use is a separately identifiable space suitable for storage.
An example:
The only fixed location for your author business is your home. Part of your basement is consistently used to store inventory. Occasionally, you utilize the space for personal reasons. You can still deduct the expenses for the storage space, even if it’s not exclusively used for business.
When claiming the home office deduction for inventory storage, keep detailed records of your inventory and any expenses related to its storage, such as shelving, storage containers, or rental fees for off-site storage units.
Calculating Your Deduction
Whether you're claiming the home office deduction for your workspace or for inventory storage, you'll need to calculate the portion of your home-related expenses that you can attribute to your business use. You have the option to do this using either the simplified method or the regular method.
1. Simplified Method
- Under the simplified method, you can deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. This means the maximum deduction you can claim using this method is $1,500 (300 sq. ft. x $5).
- This method is straightforward and doesn't require detailed record-keeping of actual expenses. It's particularly beneficial for those who prefer a simpler approach to calculating deductions.
- To use the simplified method, you only need to determine the square footage of your home office space and multiply it by the applicable rate.
2. Regular Method
The regular method involves calculating the actual expenses related to your home office and determining the percentage of your home used for business.
To calculate your deduction using the regular method, you'll need to determine:
- Direct Expenses: These are expenses that apply solely to your home office, such as repairs or improvements made to the office space.
- Indirect Expenses: These are expenses that benefit both your home and your home office, such as mortgage interest, property taxes, homeowner’s insurance, utilities, and maintenance costs.
Once you've identified your direct and indirect expenses, you'll allocate them based on the percentage of your home used for business, which is typically calculated by dividing the square footage of your home office by the total square footage of your home.
- For example, if your home office occupies 300 square feet out of 3,000 square feet, the percentage of business use would be 10% (300 sq. ft. ÷ 3,000 sq. ft.).
- You would then apply this percentage to your total indirect expenses to determine the deductible amount. For instance, if your total indirect expenses amount to $10,000, your deductible amount would be $1,000 (10% of $10,000).
- Additionally, you can deduct 100% of your direct expenses related to the home office.
It's crucial to keep thorough records of all expenses and maintain documentation to support your deductions in case of an IRS audit.
How to Decide
Deciding which method to use depends on your individual circumstances. While the simplified method offers ease and simplicity, the regular method may result in a higher deduction if your actual expenses exceed the simplified rate. Consider factors such as the size of your home office, the amount of your expenses, and your preference for record-keeping when determining the most advantageous method for your situation.
You should also note that the home office deduction is limited to the net income from your business before expenses related to your home office deduction.
If your home office expenses exceed this limitation and you use the regular method (actual expenses), you can carry the non-deductible portion forward to your next year’s return. However, you will still be subject to the business income limitation for each subsequent year.
Tips for Maximizing Your Deduction
To ensure you're maximizing your home office deduction while staying compliant with tax regulations, consider the following tips:
- Keep Accurate Records: Maintain meticulous records of your home office expenses, including receipts, utility bills, mortgage statements, and inventory-related expenses.
- Document Your Home Office and Storage Space: Take photos or create a floor plan highlighting both your home office and any designated storage areas used for inventory. This documentation can serve as evidence in case of an IRS audit.
- Consult a Tax Professional: Tax laws and regulations can be complex and subject to change. Consulting with a tax professional who specializes in working with authors or self-employed individuals can help ensure you're taking full advantage of available deductions while avoiding any pitfalls.
Final Thoughts
By understanding and leveraging the home office deduction, including its application to inventory storage, you can not only optimize your writing environment but also potentially reduce your tax burden. Take the time to familiarize yourself with the eligibility criteria, allowable expenses, and calculation methods, and consider seeking professional guidance to make the most of this valuable tax benefit.
For further information, you can also read Publication 587 on the IRS website. With careful planning and documentation, your home office can become not only a source of inspiration but also a savvy financial investment.
Do you use a home office? Do you itemize that deduction on your tax return? Please feel free to ask Susan questions down in the comments!
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About Susan
Under the pen name Michelle Allums, Susan Watts has authored a young adult urban fantasy titled, The Jade Amulet and is currently writing the sequel. Her short stories are also included in the anthologies Christmas Roses and Forever and Always.
Susan has dedicated over four decades to training in multiple martial arts styles and holds the impressive title of a five-time US Karate Alliance world black belt fighting grand champion. Through her karate school, she is able to impart martial arts and life skills. Susan also incorporates her martial arts knowledge into her writing.
An avid triathlete, she keeps in shape by running, biking, and swimming. She lives in the country with her husband, where they raise animals and enjoy being outdoors. Susan also has three grown children and numerous grandchildren. In addition, she is a CPA and VP of finance for a company in her hometown.
You can connect with Susan on social media or her website.
Disclaimer:
This blog provides information intended for general informational purposes only and should not be construed as tax advice. While we strive to provide accurate and up-to-date information, tax laws and regulations may vary depending on your jurisdiction and individual circumstances. Therefore, it is recommended that you consult with a qualified tax professional or accountant to assess your specific situation and determine the applicability of any tax deductions discussed in this article to your home office expenses. We disclaim any responsibility for any actions taken or not taken based on the information provided in this blog.
Top photo purchased from Depositphotos.
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12 comments on “Utilizing the Home Office Deduction for Authors”
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Thanks for this post, Susan! This is a spooky topic for most writers. I don't know if they'll come out of the woodwork to comment, but it's important information for them to have.
Jenny - thanks for your comments. I hope people can gain a basic understanding of this beneficial deduction and are able to utilize it on their tax returns.
As a self-employed freelance editor for many years, I have used the home office deduction regularly through several moves: plowing through the IRS directives, measuring my work spaces to calculate the percentages of housing expenses, and keeping meticulous records. The time and effort have always been worth it. We hear sometimes that the home office deduction can trigger an audit, but in more than 30 years I've never been audited. If I had been, my good records would have gotten me through. I urge anyone who might be scared off by the IRS to read this excellent post by Susan, and give this valuable deduction a try.
Thanks for your comments, Anna. The home office deduction can definitely be beneficial, and you are correct, does not automatically trigger an audit. But as long as you have accurate and detailed records, an audit should not be an issue.
What a great article, Susan! My tax accountant has been using this deduction for me, and this explains how he comes up with the numbers (simplified method). I protect that space as only for work, not just because of the deduction, but also for my productivity. This helps me understand more of how the deduction works.
Lisa - I'm glad the article was informative for you. The home office deduction can be scary for many people, but once you understand the rules, it is not that difficult - especially if you use the simplified method.
I read somewhere that you should maintain your home office space so that if an inspector walked through the door, you wouldn't have to move or hide anything.
It's an attempt to give people who work part of their time from home some of the benefits businesses get - but it could easily be abused. I spend most of my day at my computer, writing, but don't have the required exclusivity, and wouldn't claim the home office deduction.
But I DO claim expenses that are FOR my writing business, such as the cost of a cover or formatting, expenses I wouldn't otherwise have, including advertising, especially in years where it's worth the time to do the paperwork. I've never claimed ALL my expenses - my expenditures in many areas aren't worth the record-keeping.
Alicia - You are correct that the space should be maintained so that you shouldn't have to move anything if it was inspected. Also deducting items other than household expenses that are used exclusively for your author business, such as covers, editing, advertising, etc. is allowed. One of the issues that comes up is deducting items that can be used for personal purposes too. For example, if you purchase a laptop for your author business and deduct the entire cost, you need to make sure that no personal files are on the laptop. In the case of items also used for personal purposes, you could possibly allocate a portion of the expense to your business, but you would need definitive proof that the allocation is related totally to the business. Thanks for your input.
Also, some deductions serve only to offset income FROM the business. I don't make that much many years from my fiction (yet, I hope), so any business deduction may be limited, but in years where I've had a big expense and some sales, I get to keep more of the royalties if I deduct those extra expenses such as advertising and covers.
Great information! Thanks for posting!
Thanks! Glad you liked it. 🙂
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