From William Perez,
Your Guide to Tax Planning: U.S..
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Claiming expenses for your home office. The home office is one of the best things about being self-employed. You get to convert a portion of your personal expenses into a tax-deductible business expense. But beware: your home office deduction will be reduced or eliminated if you have a small profit or a loss. Looking at the Schedule C, the home office expense goes on Line 30, right after your tentative profit has been calculated. You can claim home office expenses only if you have a tentative profit, and you can at most reduce your profit to zero by using the home office deduction. You cannot use your home office expenses to create a loss. Since most freelancers already have a loss, they will be ineligible to claim their home office expenses.

Figuring your home office expenses. Calculate your home office expenses using Form 8829 (PDF). You calculate the percentage of your total home expenses that are allocated to your business use. You may calculate the percentage in one of two ways. Percentage of square feet: measure the size of your home office, and measure the size of your home. The ratio of the two will yield your home office percentage. Number of rooms: count the number of rooms in your home. Your home office percentage will be 1 divided by the number of rooms.

Convert Your Home Office into a Regular Office. The limitation on home office expenses can be avoided if you rent an office space or writer's studio. That way your rent and utilities are included as a regular business expenses without regard to the home office limit. For example, let's say your significant other leases a 2-bedroom apartment. He can sub-lease one of the bedrooms to you for use as an office. The lease agreement must be in writing, must not violate the main lease agreement for the apartment, and the monthly rent must be at a fair market value, and you must make actual rent payments. You can now deduct your rent expense without limitation.

Accounting for Your Business Assets. Believe it or not, as a freelance writer you have a number of business assets. A business asset is any property with a useful life longer than one year and which is used to produce income. Thus your website, computer, software programs, and office furniture can all be considered business assets. You have two choices for accounting for these purchases. You can treat them as ordinary expenses and deduct the full cost of purchase in the year the property is bought, or you can treat them as capital expenses and spread out the cost of the purchase over a number of years. No matter which option you choose, you will figure your expense on Form 4562, Depreciation and Amortization (PDF). Now, don't let the word "depreciation" scare you. Depreciation means spreading out the cost of a big purchase over a number of years. That's all. If you want to take the full deduction in the year of the purchase, you want what's called a Section 179 deduction, and is calculated in Part 1 of Form 4562. If you want to spread out the cost over a number of years, you are "depreciating" your property and will calculate the amount in Part 3.

Depreciate or Section 179? Generally, you should calculate depreciation last. Calculate your profit or loss before deciding on how to depreciate your assets. If you have a profit, you will want to use whichever method (depreciation or Section 179) gives you the lowest profit. If you already have a loss before depreciation, you will want to depreciate. That way more of your expenses will be moved to the following years when you may need expenses to offset additional income. Depreciation is tricky to calculate, and moreover you need to "tweak" your depreciate based on the decision factors I just discussed. As such, prepare your taxes using a computer program so you can easily recalculate your depreciation amounts. Since most freelancers have business losses, I recommend that freelancers use normal depreciation methods for their business assets. That means, I recommend against taking Section 179 deduction or any "special" or "bonus" depreciation. If you plan to depreciate your assets, the following material is recommended reading: Tax Topic 704 Depreciation, Publication 946 How to Depreciate Property, and Depreciation from Publication 334 Tax Guide for Small Business.