Co-working spaces tend to provide a vast range of benefits to freelancers, and these people can also leverage the tax advantages these workspaces offer. Have it in mind that paying for office space comes with a wide array of tax benefits, especially for professionals who are not looking to over-complicate the math.
Co-working spaces reduce a lot of costs associated with business operations, which can include your basic regular membership fees. In a bid to reduce confusion when it comes to the taxation of coworking spaces, the IRS has put together detailed guidelines about tax deductions relating to co-working spaces and home offices.
This indeed has gone a long way to help reduce the number of forms to be filled and the processes have become easier. It is always beneficial to be aware of the tax benefits on offer before you make the final decision of renting or leasing a co-working space. If you are really interested, here are the basic tax implications of working in a co-working space.
Tax Implication of Working in a Coworking Space
Co-working Memberships are Tax-Deductible
In the United States, freelancers and solopreneurs tend to fill out a Schedule C form during tax season, and this form lists out all of their tax-deductible business expenses for the year. One item on the Schedule C form is “Rent,” and Co-working genuinely falls under this category.
Note that freelancers who work from home are allowed to deduct a percentage of their rent or mortgage under this category. Have it in mind that this percentage is mostly based on the square footage you use for your office (eg. if your office space is 200 square feet in a 1,000 square foot home, then you could deduct 20% off your rent or mortgage).
This percentage features utilities, such as power, internet, and water. However, many freelancers do not have a dedicated home office and instead use their kitchen table, living room couch, or even a desk stashed in a spare corner.
This makes it very challenging to calculate square footage for tax purposes, and this entails that you could either overestimate your expenses or end up leaving money on the table. For a home office to be tax-deductible, freelancers are expected to be able to prove that their expenses account for more than two percent of their adjusted gross income.
For freelancers or professionals who have transitioned from home to a co-working space, calculating their office tax write-off becomes easier. They can just deduct the full amount of what they pay for their membership under the “Rent” category on Schedule C.
Food Is not Tax-Deductible
For freelancers and professionals working in a co-working space, some business expenditures that are a part of your daily activities can qualify as tax-deductible. For example, if you intend to host a business meeting in the space, you have the right to claim a specific percentage of the total expenditure as long as the discussion of business is under the tax code changes.
But you must understand that other costs like daily meals are a part of your own personal expenditure. Even if you buy anything from the canteen or food court for normal consumption, this expenditure will still not qualify for tax deduction because it is just a regular expense on food.
Commuting is Also not Deductible
In the United States, the IRS is specific that not all co-working “expenses” may be deducted from your taxes. Two of the biggest items that shouldn’t be included are parking and the cost of your commute. Aside from the cost of public transport, commuting also includes the use of private vehicles and could include other costs like toll fees, gas, petrol, and parking.
If you regularly commute to a particular location for work, those expenses are not deductible. But if you work primarily from home but commute to meetings irregularly, on an as-needed basis, the cost of travel can be deducted from your tax return.
Note that this is an issue to discuss in more detail with your tax professional so that you can make the decisions that best benefit your situation.
Crossing State Lines
If the coworking space is in the same state where you reside and file your taxes, then there is likely no tax implication to worry about. Howbeit, if you are now working from a co-working space in a different state from where you were previously going to work (i.e. crossing state lines), then you could have some new tax implications to handle.
Note that your federal income taxes won’t in any way be impacted. However, for state taxes, income tax tends to depend on where the co-working space is based and the sort of product or services you render, meaning there could be additional tax burdens.
In the United States, working or living in a state can result in what’s called “tax nexus.” The term “nexus” simply describes a business with a tax presence in a particular state.
A good number of states have explicitly noted that the presence of a telecommuting employee who is not engaged in sales, boast of no contact with in-state customers, and whose location is not considered to be a place of business for the employer would still trigger the out-of-state employer income tax nexus in the state in which the employee is located.
Simply put, the employee’s remote location, like a co-working space, could also be classified as an office location, leaving the employer prone to tax nexus in that state. In the same vein, the employee could be subject to state income tax in the state they are remotely located, even if they are just visiting for a while.
Other Tax Dos and Don’ts When Using a Co-working Space
Just like it was noted above, aside from your co-working membership dues, there may be other expenses connected with the office space that you can write off on your taxes.
Some of the most common items include conference room rental fees, printing fees, networking events, business mailbox or physical address, and live answering services. One of the benefits of working from a co-working space is that you won’t even have to keep track of separate bills — rent, utilities, and maintenance are all included in a set monthly cost.
Understanding the tax implications of working from a co-working space can be quite challenging, especially for new entrants. Always remember to consult professionals to understand more. It is always recommended to be conversant with the tax benefits on offer before you decide to lease the co-working space.