June 7, 2023

A Streamer's Guide to the Home Office Deduction

Contents

Introduction

If you've turned your streaming hobby into a full-fledged business, you’re probably getting curious about the tax consequences of your success. 

When it comes to taxes, you should acquaint yourself with the "home office deduction." The home office deduction allows streamers to reduce their tax bill by deducting expenses they’re already paying for, such as rent & internet, to reduce their tax bill.

The home office deduction is particularly important for streamers because the cost of maintaining a streaming studio can be substantial. By not taking the home office deduction, you’re leaving a lot of money on the table.

Let’s walk through how this deduction works from a streamer’s perspective.

Are streamers eligible for the home office deduction?

First, let's clarify what we mean by "streamer"in the context of taxes. 

A streamer is someone who regularly broadcasts live content online, often on platforms like Twitch, YouTube, or Facebook. This can involve playing video games, creating art, chatting, or other activities. 

Many streamers earn income through viewer donations, subscriptions, ad revenue, or sponsorships. and for the purposes of the home office deduction, the IRS considers this as a business.

You must be operating a business in order to take the home office deduction. Streaming as a hobbyist doesn’t make you eligible for the deduction. You must be earning money from streaming in a way that qualifies you as a business owner.

In addition to running a business, the IRS stipulates that your home studio must fulfill two key requirements to qualify for the home office deduction:

  1. Regular and Exclusive Use: You must regularly use a portion of your home exclusively for conducting business. For streamers, this would be the area where you do your streaming - be it a room, or a part of a room. Exclusivity is the key word. If you're using your streaming room to also watch Netflix or do workouts, your streaming studio wouldn’t be exclusively used by your business so it might not qualify for the home office deduction.
  2. Principal Place of Your Business: Your home office must be your primary place for conducting your business. As a streamer, if you're broadcasting your content from this space or doing administrative work such as content planning, then you're likely to meet this requirement.

Keep in mind that what matters is how consistently and exclusively your business uses your home office, not its size. If you think you satisfy these conditions, there’s a good chance you can take the home office deduction. 

How the home office deduction works

There are two ways to take a deduction for your streaming studio: the Regular Method and the Simplified Method.

The Regular Method:

You can deduct part of your actual home-related expenses using the Regular Method. Expenses under this method are in either one of two buckets:

  • Direct Expenses: These are costs that are exclusive to your home office. For streamers, direct expenses could include cleaning and repairs directly associated with your streaming space. You can deduct the full cost of these items.
  • Indirect Expenses: These are costs that benefit both your home and your home office, such as rent, mortgage interest, utilities, home insurance, and property taxes. To deduct indirect expenses, you'll need to determine the percentage of your home used for business and apply that percentage to the total expenses.

The Simplified Method:

If the Regular Method is too complicated, the Simplified Method is a more straightforward option to claim the home office deduction. Instead of itemizing and calculating various expenses, by using the Simplified Method you take a deduction based on a fixed rate multiplied by the square footage of your home office.

The IRS currently allows a deduction of $5 per square foot, up to a maximum of 300 square feet. This means you can deduct up to $1,500 using this method. The advantage of the Simple Method is that it eliminates the need for detailed expense tracking, making it a simpler option for busy streamers.

Comparing the two methods

Choosing between the Regular Method and the Simplified Method depends on your unique circumstances. Here are factors to consider when deciding on which method to use:

  • Complexity: The Regular Method requires tracking your actual expenses, which may entail analyzing how much of an expense was for personal vs business purposes.
  • Deduction Amount: The Regular Method usually provides the greatest tax benefit, as long as you’ve got good records to support your deduction.
  • Time and Effort: Taking the Simplified Method will usually save you time and effort, especially if you have a smaller home studio.

Calculating the home office deduction for streamers

In reality, your tax software (if you’re using one) will calculate your home office deduction and select the optimal method. In either case you’ll still need good records for an accurate calculation.

Let's break down the process for both methods.

Measuring the Office Area:

To calculate your home studio deduction, you'll first need to determine the square footage of your home studio space. 

Measure the dimensions of the room or area used exclusively for your streaming activities. Multiply the length by the width to get the total square footage.

For example, if your studio space measures 10 feet by 12 feet, the total area would be 120 square feet.

Bear in mind that if your streaming space only takes up part of a room, and the rest of the room is used for other activities (such as sleeping), you should only measure the part that’s occupied when you’re streaming.

Calculating the Deduction:

Under the Simplified Method, the calculation is very straightforward. Multiply the square footage of your home office by the IRS-set rate of $5 per square foot. Bear in mind that the maximum deduction allowed under this method is $1,500.

Using our previous example of a 120 square foot streaming studio, you could deduct $600 (120 x $5) if you choose the Simplified Method.

The Regular Method calculation is more complicated. You must bucket your home studio expenses by Direct and Indirect expense categories.

Direct Expenses: 

Direct expenses are expenses associated with the home studio and used exclusively in your streaming. You can deduct the full cost of direct home studio expenses, such as cleaning supplies & repair services. Keep track of these expenses separately.

Indirect Expenses:

For indirect expenses, first calculate the percentage of your home used for business purposes as we did above. Divide the square footage of your home studio by the total square footage of your home. 

For example, if your home studio is 120 square feet and your home is 1,500 square feet in total, then the business-use percentage would be 8% (120/1500 = 0.08 or 8%).

Apply this percentage to the sum of your total indirect expenses. For instance, if your total indirect expenses for the year are $5,000, you can deduct $400 (0.08 x $5,000) as your home studio deduction in addition to the full amount of any direct expenses.

Choosing the Method:

Assuming you’re going with the Regular Method, your next step should be to compare it to your deduction under the Simplified Method. You’ll want to select the method that yields the highest deduction. Your tax software should make this comparison for you.

Common home office expenses for streamers

There are specific expenses that the IRS allows you to deduct for your home office. Let's review a few common expenses that pertain to streamers and could be eligible for the home office deduction:

  1. Rent or Mortgage Interest: A portion of your monthly rent payment or mortgage interest may be deductible based on the square footage of your studio relative to the size of your entire home.
  2. Utilities: Expenses such as electricity, heating, cooling, and water directly may be deductible. Like rent or mortgage interest, the deduction is limited by the size of your studio relative to your entire home. 
  3. Internet Costs: Your internet subscription might be deductible. The deductible amount would be the proportion of the subscription that’s used for streaming relative to the subscription’s total usage (e.g. 8 hours per day divided by 24 hours).
  4. Home Insurance: A portion of your homeowner's or renter's insurance premiums that covers your home office area may be deductible. Determine the percentage of your insurance costs related to your home office.
  5. Property Taxes: If you’re a homeowner and pay property taxes on your home, you might be able to deduct the taxes based on the size of your home studio relative to the size of your home.
  6. Repairs and Maintenance: Your home studio space's upkeep and repair costs are 100% tax deductible. Depending on the size of your home studio in relation to the size of your home, repairs and maintenance costs for the entire home would be partially deductible.
  7. Depreciation: If you’re a homeowner, you may be able to deduct the cost of your home studio through depreciation. You’d allocate the cost of your home (minus land cost) to the space occupied by your home studio and deduct the cost annually.

For other expenses, the general rule is that an expense is only deductible to the extent you use it in your streaming business. Some expenses might be for both business and personal use. That’s OK, but you should reduce the deduction accordingly.

How to claim the home office deduction for streamers

Let's walk through the steps and forms required to claim the home office deduction.

Forms Needed:

In all likelihood, your tax software will pull together the appropriate forms, but in case you’re curious here’s a rundown of what’s going on behind the scenes: 

  • Form 8829, "Expenses for Business Use of Your Home": This is the form that calculates your home office expenses. You’ll input information about your home, including the total square footage, the square footage used for your home office, and the expenses incurred (both direct and indirect).
  • Schedule C, "Profit or Loss from Business": As a self-employed streamer, you’ll use this form to report your business income and expenses. You’ll transfer the home office deduction on Form 8829 to Schedule C.
  • Form 1040, "U.S. Individual Income Tax Return": The numbers on Schedule C then get transferred to this form, the main form for reporting your personal income and deductions.

Tips for Filling out the Forms:

  • Be Organized, Keep Receipts: Maintain proper documentation of your home office expenses, including receipts, invoices, and bills, will help substantiate your deduction if you’re ever audited.
  • Calculate Square Footage Accurately: Only measure the portion of your home office that’s used regularly and exclusively for business. You can find the square footage of your entire home on property tax records.
  • Consult IRS Publication 587: It’s on the IRS website, and it provides detailed information and examples regarding the home office deduction.

Consult a professional if you have questions

By properly claiming the home office deduction, streamers can get a tax benefit for expenses they’re already paying for. The key is taking this deduction in a way that’s IRS-compliant but also maximizes your after-tax profits.

If you’ve got questions about your home studio, or would like to speak with a tax professional who understands the streaming business, get in touch through the contact form linked below. We’d love to hear from you!

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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