November 10, 2023

The Home Office Deduction for Musicians - A Simple Guide

Contents

As a music industry professional, you should acquaint yourself with the "home office deduction” if you’re looking to pay less tax on your business income.

The home office deduction is a way to use expenses you’re already paying for–such as rent, utilities, & internet–to offset the taxable income you earned as a self-employed musician, resulting in less taxes paid.

Before taking this deduction there are a few rules you should be aware of, such as hobby income vs. business income, the regular and exclusive use tests, the two methods you can use to calculate the deduction, and others.

In this guide I’ll walk you through the essential details so that you can confidently take the home office deduction on your tax return.

Are musicians eligible for the home office deduction?

Yes, self-employed musicians are eligible for the home office deduction, provided that an area of their home is regularly and exclusively used to conduct business.

It’s important to understand what a “home office” is in the context of a “self-employed” musician.

Music industry professionals earn income in a variety of ways. Whether it’s through performances, royalties, session work, production fees, lessons, or other sources, the IRS considers income earned as a musician to be “self-employment” income. 

In other words, income earned as a self-employed musician is business income.

As a business owner, you’re required to pay taxes on business income, but you can deduct ordinary & necessary business expenses to reduce the amount of tax you’ll pay.

One such deduction is the home office deduction.

Your home office might not be an “office” in the traditional sense, but as long as you have an area of your home that’s regularly and exclusively used by your music business, such as a home studio, then you might have a deductible home office.

The home office deduction isn’t allowed for hobby musicians

Bear in mind that you must have operated a business to be eligible for the home office deduction. Hobby musicians aren’t eligible for the deduction. 

If you’re a casual guitarist, for example, and occasionally play for tips, then you may not qualify for the deduction. You’d still need to report the tips as hobby income.

The IRS provides a list of questions for determining whether your music activities comprise a business or (as far as the IRS is concerned) a hobby. Take a look at this list if you’re unsure.

Basic requirements of the home office deduction 

In addition to having a business connection, tax law stipulates that your home office must fulfill two basic requirements:

  1. Regular and Exclusive Use - You must regularly and exclusively use a portion of your home for conducting business. Whether it’s a room, part of a room, or two rooms, if you're using the area for other activities, like sleeping, or only work there on occasion, then the area wouldn’t be regularly and exclusively used by your business.
  2. Principal Place of Your Business - Your home office must be the primary place for conducting your business. It need not be the only place where you work, but as long as you’re doing administrative work (such as securing gigs or emailing clients) then you're likely to meet this requirement. The actual production or rehearsal of music can happen elsewhere.

What matters most is how consistently and exclusively your business uses the home office area and the type of work you do in that area, not the size of the area. If you satisfy these conditions, you can take the home office deduction. 

How the home office deduction works

You calculate the home office deduction in one of two ways:

  1. Regular Method; and 
  2. Simplified Method.

As you might’ve guessed, the Simplified Method is easier to calculate but the Regular Method could provide a larger deduction.

The Regular Method

Using the Regular Method, you deduct actual expenses to the extent they impact your home office. Expenses under this method fall into one of two buckets:

  • Direct Expenses - Direct expenses are costs exclusive to the home office. For musicians, direct expenses could include cleaning and repairs directly associated with your studio or other workspace. You can deduct the full cost of these expenses.
  • Indirect Expenses - Indirect expenses 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 first determine the portion of your home that’s used for business and apply that percentage to the total expenses.

The Simplified Method

The Simplified Method is, well, a simpler way to calculate the home office deduction. Instead of apportioning various expenses, the Simplified Method uses a fixed rate multiplied by the square footage of your home office to calculate the deductible amount.

The IRS currently allows a deduction of $5 per square foot, up to a maximum of 300 square feet. The most you can deduct under the Simplified Method is $1,500. The advantage of the Simple Method is that it eliminates the need for detailed expense tracking, making it simpler to calculate.

Comparing the two methods

The question of whether the Regular Method or the Simplified Method is your best option depends on a few factors. You’ll make the selection when filing your tax returns. Here are some things to consider:

  • Complexity - The Regular Method requires tracking your actual expenses and calculating the area of both your home office and home, which takes time and effort.
  • Quality of Records - You must be able to substantiate home office expenses. If you’re missing receipts or other supporting documentation for certain expenses, you might be better off using the Simplified Method.

Assess whether the Regular Method would provide a larger deduction. Then consider whether the time and effort required to track down home office expenses and supporting documents are worth the tax benefit. If so, the Regular Method is probably your best bet.

Calculating the home office deduction

If you’re filing your own tax return, the tax software will likely calculate the home office deduction using both methods and select the optimal method. Your CPA or other tax preparer will likely run the same analysis. 

In either case you’ll still need to gather information to make an accurate calculation. Let's break down the information gathering process for both methods.

Step 1 - Measuring the Home Office Area

To calculate your home office deduction, you'll first need to determine the area of your home office space in terms of square footage.

Measure the dimensions of the room, or the dimensions of a home office area within a room, that’s exclusively and regularly used by your music business. 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.

Subtract out any portion of the space that’s not used by your business (such as where you sleep). You should only measure the part that’s occupied when you’re working on your music business.

Step 2 - Calculating the Deduction

Under the Simplified Method, the calculation is straightforward. Multiply the square footage of your office area by the IRS-set rate of $5 per square foot but limit the deduction to $1,500.

Using our previous example of a 120 square foot studio, you could deduct $600 (120 sq. ft. x $5) if you choose the Simplified Method. Assuming the studio is 400 square feet, the deduction would be $1,500 (400 sq. ft. x $5 = $2,000 capped at $1,500).

Under the Regular Method, you’ll need to track down your actual home office expenses and bucket the expenses by Direct and Indirect expense types.

Direct Expenses

Direct expenses only affect your home office or studio, such as office cleaning supplies or repairs. You can deduct the full cost of direct expenses.

Indirect Expenses

Indirect expenses apply to your entire home, such as rent or utilities.

For indirect expenses, first calculate the percentage of your home that’s used for business purposes. Do this by dividing the square footage of your home office or studio by the total square footage of your home. 

For example, if your home office is 120 square feet and your home is 1,500 square feet, then the business-use percentage would be 8% (120 sq. ft. / 1,500 sq. ft. = 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.

Note on Mixed-Use Expenses

When taking deductions, an expense is only deductible to the extent it’s a business expense. Some expenses, such as a cell phone subscription, provide both a business and personal benefit. These expenses are called mixed-use expenses. 

Calculate your home office and mixed-use expense deductions separately.

The business-use portion of home internet costs, for example, doesn’t necessarily correlate with the square footage of your home office. You’ll need to use an alternative method to calculate the deductible amount. A common method is to divide the total subscription hours by the number of hours that the subscription is used in your business. 

Mixed use expenses should be deducted on Schedule C (see below).

Step 3 - Choosing the Calculation Method

Next, compare the home office deduction under both methods. You’llmost likely select the method that yields the highest deduction. Your tax software should make this comparison for you, but you should still review the selection.

Common home office expenses for musicians

There are specific expense categories that the IRS allows when calculating direct and indirect home office expenses. Let's review common expenses that a music industry professional might include in their 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 home office or studio relative to the size of your entire home.
  2. Utilities - Expenses like electricity, heating, cooling, and water may be deductible. Similar to rent or mortgage interest, the deduction is limited by the size of your studio relative to your entire home. 
  3. Homeowner’s or Renter’s Insurance - A portion of the homeowner's or renter's insurance premiums that cover your home office area may be deductible. 
  4. Property Taxes - If you own and pay property taxes on your home, you might be able to deduct a portion of property taxes as a business expense instead of deducting them as an itemized deduction on Schedule A.
  5. Repairs and Maintenance - Costs specific to the upkeep and repair of your home office or studio are deductible. Repair and maintenance costs for the entire home would be partially deductible.
  6. 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 additional deductions, check out our list of tax deductions for music industry professionals.

How musicians take the home office deduction

You’ll take the home office deduction when filing your tax return and you’ll file a tax return annually, before April 15th of the following year (unless you file a six-month extension). 

Here are the steps and forms required to claim the home office deduction.

Forms Needed

Unless you file a paper tax return, your tax filing software or tax preparer will automatically put together the appropriate forms. 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 on which you’ll calculate the home office deduction. 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 music professional, you’ll use this form to report the income and expenses from your music business. You’ll transfer the home office deduction on Form 8829 to Schedule C.
  • Form 1040, "U.S. Individual Income Tax Return" - You’ll then transfer amounts on Schedule C to Form 1040, the main form for reporting your personal income and deductions.

Tips for Filling out the Forms

  • Be Organized, Keep Receipts - Maintaining proper documentation of your home office expenses, including receipts, invoices, and bills, will help substantiate your deduction if you’re ever audited.
  • Document Your Home Office Calculation - Only measure the portion of your home office that’s used regularly and exclusively for business. Take a photo, perhaps. 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.

For a more comprehensive walkthrough of the tax filing process, refer to our tax guide for music industry professionals

Have questions about the home office deduction for musicians?

Whether you have questions about the home office deduction or something else, if you’d like to speak to a tax professional who understands the music business, please get in touch through the contact form linked below. I’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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