The Tax Impact of Where You Work
For independents, entrepreneurs, digital nomads and remote workers, figuring out where your best work happens is an important step towards success. You’ve got lots to consider: distance, parking, public transport, space, business needs and networking opportunities. Many of these considerations impact your bottom line but, it turns out, where you work can also help your bottom line when it comes to tax time.
Businesses or individuals who rent an entire office space have it easier when it comes to understanding the deductions available to them.
We talked with Helena Swyter of Sweeter CPA, a firm focused on helping creatives with all their accounting needs, about how a using a coworking space, coworking membership like Deskpass and working from home all factor into your tax obligations…and relief.
Can you deduct a coworking membership?
Absolutely. Be sure to talk to an accountant if you are looking to deduct the cost of a home office to make sure you qualify for both.
Can you deduct the commute / mileage / parking to a coworking space?
No. The IRS is very clear about the cost of a standard commute not being deductible. That means that if you regularly go to and from the same place to work (e.g., coworking space, client site for long-term project, or, for comparison, your employer’s location if you are an employee), the cost of transit to and from and parking at that location is not a business expense.
However! There are a few cases where some of the transit-to-coworking-space could be deductible:
- If you do not typically work at a coworking space but are headed there for a one-off or semi-regular meeting/event
- If you are reimbursing parking for someone who came to meet with you.
Are there other expenses at a coworking space (extra to rent a conference room, printing costs, networking events) that could be deducted?
All sound deductible. The only thing I would caution is food — people sometimes think they can deduct food they buy at restaurants or coffee from Starbucks just because they are working and aren’t home. If you regularly work at a coworking space, lunch is on you. I encourage people to think about someone who is an employee. They eat lunch every day and don’t get to expense it just because they are at work.
Lunch or coffee meetings are different, but if you are just eating lunch solo because it’s noon, that’s your personal expense.
Do the rules for home office or coworking space work differently for solopreneurs/independents/freelancers vs someone who brings in a team vs someone who works remotely for a company?
The only person who would be treated differently in that list is someone working remotely for a company, because we’d need to know whether or not they are an employee of that company.
Employees are treated differently than sole props/LLCs/S-Corps and their unreimbursed expenses (meaning what they pay for a coworking space or to maintain a home office assuming their employer does not reimburse them) are deducted on their Schedule A. This means that in order to claim those expenses, they have to 1) itemize deductions and 2) those expenses have to exceed 2% of their adjusted gross income.
Roughly translated to English, that means that the employee working remotely and paying for a coworking space is not going to be able to deduct as much of the cost as someone working for themselves or leading a team at that same coworking space. While this sounds complicated, any accountant worth their salt could explain it to an employee working remotely, so I’d encourage someone in that situation to seek consulting on the topic.
As for home office, the questions are typically What? and then How?
What:
If you use a space in your home regularly and exclusively for business, you may be entitled to a deduction.
Regularly means that this is the space where you habitually sit down to do the administrative functions of your work. People then respond with “what about if I go to Starbucks?” and the answer is that that is totally fine — the IRS in interested in where you regularly go when you are issuing invoices, responding to emails, ordering supplies, etc. If that is a space in your home, it would qualify.
Exclusively means that the space is only used for business. This rules out people who work from a laptop on their kitchen table (as they probably also eat there) or sitting on the couch (as the couch would be used for other purposes as well). It has to be a space that is solely used for work. The IRS no longer requires a separate room with a door, but it has to be a unique space that is just used for business.
How:
We calculate the square footage of your office over the square footage of your entire space to get a percentage. (Bonus — if you have a business that involves storing inventory or supplies (common for makers), inventory storage space counts toward the square footage of your office.) This percentage is then multiplied by the common expenses of maintaining a home:
- rent
- heat/cooling
- trash removal
- water
- mortgage
- insurance (incl. renters insurance)
The deduction is then either taken directly on your tax return (if you are a sole proprietor or a single-member LLC) or via reimbursements from your business to your personal bank account (if you are an S-Corp or partnership). If you are another kind of legal entity, I recommend talking to an accountant before proceeding.
The home office deduction reduces your income subject to self-employment tax. Self-employment tax is a 15.3% tax on earnings from self-employment (it’s how those of us who are self-employed pay into the social security and medicare programs), so this can be a significant savings and is worth looking into.
Big thanks to Helena Swyter of Sweeter CPA for sharing her knowledge and experience. If you’re looking for a fantastic, thorough and savvy CPA, tell her Deskpass sent ya.
Get a complimentary $250 Deskpass credit when you sign up for a Teams account today.
