Can freelancers deduct their rent?

Most people cannot deduct rent at all. If you are a W-2 employee working from your apartment, the 2018 tax law changes shut that door. But if you are self employed, a freelancer, or a creator running your own business, rent can become a real deduction in a few different ways.

The home office deduction

The most common path is the home office deduction. The IRS has three rules here:

• You use the space regularly for work.
• You use it exclusively for business.
• It is your principal place of business.

Say you live in a 1,000 square foot apartment and your office is 100 square feet. That is 10%. If you rent is $1,500 a month, you can deduct $150 a month, or $1,800 a year.

The IRS also has a simplified version. Instead of math, you deduct $5 per square foot up to 300 square feet. The cap is $1,500 per year. Easy, but often less valuable.

Renting a separate space

If you rent a dedicated office, studio, storage unit, or even a coworking membership, the cost is 100% deductible. The key is that it must be exlusively for business. You cannot double dip by writing off both your apartment rent and your coworking membership in the same period.

Rent while traveling

If you are on a business trip that requires an overnight stay at least 100 miles from home, the rent you pay for lodging is deductible. That includes hotels, Airbnbs, or extended stay apartments. The rules are stricter here:

• The trip must be for business
• The stay has to be less than one year
• You need proof of the purpose

Special situations for digital nomads

Creators who live on the road run into more complicated rules. The IRS wants you to have a tax home. If you bounce around for three to six months in once place, you may qualify for the home office deduction, but this area is still gray. Renting coworking spaces abroad is the safer route, since those are clearly deductible.

State level credits

A few states also throw in rent credits. California has a small nonrefundable renter’s credit. Maryland offers up to $1,000 for qualifying low income or older renters. Minnesota has renter’s credit built right into the state tax return that refunds part of your rent based on income.

States with rent tax credits:

Limits you need to know

• The rent has to be reasonable. Paying inflated rent ot a relative and trying to deduct it is not going to fly.
• Mixed use is not allowed. If your office is also your bedroom, you cannot count it. Exclusive use means exclusive.
• Documentation matters. Keep your lease, payment records, and proof of business use.

Bottom line

Rent is not deductible for most people, but freelancers and creators get some powerful exceptions. A true home office, a separate studio, or business lodging can all reduce your tax bill. Beluga has been able to help creators and other freelancers being able to save thousands on rent deductions.

Just follow the rules, keep the paperwork, and make sure the space really is for work.

Keep on Creating!

— The Beluga Team