Before we get too deep into this one, heed this warning: Home office deductions are a huge red flag for the Internal Revenue Service (IRS). The IRS has established a strict set of rules on home office deductions and too many taxpayers try to flaunt them. So unless you have a perverse love of audits, rein in your creativity on this one.
According to the IRS, a portion of following expenses may be deducted for a qualifying home office [source: IRS]:
- Mortgage interest
- Utilities (electricity, heat, water, gas, internet service, telephone service, etc.)
- Painting and repairs
Instead of itemizing, you can opt for taking a standard deduction of $5 per square foot of home office space, up to 300 square feet.
Again, the IRS is a stickler on this one. A qualifying home office is a part of the home that is used "exclusively and regularly" as the principal place of business [source: IRS]. Ideally, it's a separate structure from the living quarters of the house. If not, then it needs to be a place set aside exclusively for business purposes. People get into trouble when their bedroom doubles as their graphic design studio, or they work from home a couple of days a week because the commute is too long [source: Turbotax].
But if you already have a portion of your home set aside exclusively for business purposes, then you have the right to take as many deductions as you deserve. For example, if you regularly meet clients or customers in your home office, you can deduct the cost of repairs and maintenance — even landscaping — to the home that make it more presentable [source: TurboTax].
Note that if you temporarily worked from home for an employer during the COVID pandemic, you cannot deduct home office expenses. The IRS reserves home office expenses for self-employed workers and sole proprietors [source: TurboTax].
Now let's see how you can save tax dollars by turning your hobby into a small business.