With the pandemic raging, many employees were asked to work from home to help prevent the spread of the virus. Now that it is tax time, I am getting asked if they can deduct their home office expenses on their tax return.
The bad news is if you are an employee rather than a business owner, under the Tax Cuts and Jobs Act passed in 2017, unreimbursed employee business expenses are not deductible for 2018-2025. This means that if the employer chooses to reimburse you for your home office expenses under an accountable plan, you are lucky and if you aren’t reimbursed, then there is no deduction and you are out of luck.
If you are a business owner, the home office deduction is available to you still.
If you work from home and make your home your principal place of business, you may be able to deduct your home office expenses whether you own or rent your home. It doesn’t have to be an office at home. You might have a workshop or studio.
Many people believe that claiming the home office deduction is an audit flag and as a result, many who qualify for it don’t claim it. The IRS denies that the home office deduction increases the chance of being selected for an audit. If you are entitled to it, you should take and have no fear should you be audited.
To qualify for the home office deduction, you must meet certain requirements. The first requirement is that you have a portion of your home that is used regularly and exclusively for a trade or business. While the IRS doesn’t define what regular use looks like, it does suggest that it should be on a continuing basis and not just for occasional or incidental business. Even a few hours a day will likely satisfy this test. Exclusive use means that the portion of your home that is used for business is only used for business. No personal use is allowed. The space doesn’t have to be a whole room; it can be some part of the room that is only used for business. It doesn’t even have to be part of the house. You can have a freestanding structure such as a garage, barn or studio that is used exclusively and regularly for business.
The second requirement is that your home office is used as your primary place of business. Most self-employed people meet this requirement. You should do most of your work at home. If you do all or most of your work in your home office, your home is your principal place of business.
If you only do administrative work at home, you may still qualify. Building contractors, traveling salespeople, painters, etc. work away from the home but can still qualify for the deduction if they use the office to conduct administrative or management activities (invoicing, bookkeeping, paying bills, etc.) for their business and they have no other fixed location from where they conduct such activities.
If your home doesn’t qualify as your principal place of business, you can still take the deduction if you regularly meet clients or customers in your home office or if you are selling products, retail or wholesale, and store inventory or product at home.
There used to be three ways to deduct this expense but now there are only two. The first is as the home office deduction as part of the Schedule C – Profit and Loss from Sole Proprietorship. The second was as an unreimbursed employee business expense. The third is as an unreimbursed partnership expense if required by the partnership. The first and third are still available to you depending upon how your business is organized. The second was eliminated as part of the TCJA. (If you are not a sole-proprietor, it is best to have your business reimburse you for the business use of your personal home.)
There are two ways to calculate the deduction. The standard method is to find the percentage your home office represents as a piece of the total property square footage and apply it against the total expenses of the home (utilities, depreciation, repairs and maintenance the benefit the entire property, HOA fees, insurance, rent, mortgage interest, property taxes, etc.). If your home office is 50 square feet and your home is 1,500 square feet, you would deduct 3.33% of the total home expenses. If the costs were $5,000, your deduction would be $166.66. You must keep record of these expenses in order to claim them.
The other method is the simplified method. This is a flat $5 per square foot multiplied by the home office square footage. If your home office was 50 square feet, your deduction under this method would be $250. No records to keep. You can’t deduct more than $1,500 under this method (300 square feet home office).
The deduction is limited to your business profits meaning that you can’t deduct more than the profit of your business, but you can deduct unused amounts in the future as a carryforward expense. You will claim the expense on Form 8829.
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