How to determine percentage of time home office used for freelance

Question

I work freelance approximately 40-hours a month as part-time work. When determining my taxes how should I calculate the amount of time I use my home office for working? I do not use the home office exclusively for work, as I also use it for general web usage. And along those lines, how would I calculate the amount of Internet I use, if I wanted to write-off some of my internet bill?

Answer 1

It's probably reasonable for you to make a rough estimate of the percentage of business use for your home office and Internet. You could keep a diary for a week or a month, noting down your hours for personal and business use and then extrapolate these numbers for the whole year.

There is no easy way for the tax department to check the actual percentages so they need to rely on your honesty and are unlikely to question your estimate unless it seems excessive (e.g compared to what others claim).

As long as you can explain how you arrived at the percentage amounts, you should be fine.

You should probably get some professional advice about the tax implications of claiming your home office as a tax deduction. In some jurisdictions, this isn't always a good idea. In Australia for example, home owners have a capital gains tax exemption on the home they live in but claiming a home office as a tax deduction can affect the exemption with potentially huge financial implications.

Answer 2

IRS requirements call for regular and exclusive usage of the office for your work, and generally allow percentage rooms, or percentage square feet. So, 1 room in 5 (20%), or 200 sq ft out of 1000 sq ft (20%). It sounds like you're not full time, so I would just declare a regular space you use exclusively for work and stick to it. It could be a small office in your home, or depending on your living situation, 30% of a spare room for instance. Just be reasonable in the estimate, and not try to declare your entire living room, bedroom, or dining room absurdly. If it's reasonable, they're generally just going on your honestly for this.

For things like internet, make an educated estimate based on your history. Do you spend about 10 hours a week on internet for personal use? Then do 50/50% for business personal. Do you spend significantly more time for personal use than business? Go 25/75% for business personal. Over the years I've stopped trying to come up with numbers like 47%.

Answer 3

As Scott has commented on your question, "home deductions" are pretty hard to claim if you have a "mixed use" area in your home. My experience in this area has evolved from part-time freelance to starting a full time operation, but all of it still resides within my home.

My accountant has had me create dedicated Quickbooks accounts (you can use Freshbooks, Mint, whatever) and actually enter bills for rent and utilities from my personal life to my business operations. The amount I invoice for is the estimated percentage of use, and I arrived at this percentage basically doing as Neil Robertson suggested. At the end of the year, you have a record of the specific amount that your business has contributed towards your rent and utilities.

So, for example: In your Quickbooks file for your freelance operation, make a "Vendor" that's actually you (or in my case, my wife). Now, enter a bill from this vendor for the amount your freelance business owes in rent and utilities for the month. Pay this bill from your freelance checking account/cash/PayPal/cookie jar every month.

As the last part suggests, you might want to have a dedicated checking account or something that you can track your income and expenses for your freelance, but that wasn't part of your original question.

Again, I'm not an accountant, but this is what my accountant has me do. If you have an accountant or financial advisor, check with them about this advise before really moving forward.