If the pandemic completely changed what a day at work looks like for you, you’re not alone. COVID-19 caused many companies to transition to remote work.
And this may not be temporary; some employers are considering making the shift to work-from-home permanent. If you’re working from home, you might assume you’d qualify for a home office tax deduction. Unfortunately, the home office deduction is only allowed for self-employed people, not their employees.
Those who do qualify need to be mindful of some potentially tricky details. While you’ll want to dig into the details in IRS Publication 587, 1 here’s an overview.
What Is a Home Office Deduction?
The home office deduction allows taxpayers to deduct a portion of their home’s expenses as a business expense. If the home office makes up 10% of the whole home, you could deduct 10% of the mortgage interest or rent, insurance, utilities, repairs, or depreciation.
The IRS notes these are two requirements for individuals to qualify:
- Regular and exclusive use: The use of a portion of your home for business must be regular and exclusive. The work area cannot double as a personal space.
- Principal place of your business: Your home must be the principal location at which you conduct business. This does not mean that your home is your only place of business, but if you have another business location, you will need to consider the amount and importance of the work you do in your home office.2
And, as noted, this deduction is for small business owners and freelancers, not employees. The following are considered self-employed individuals:
- Sole proprietors and independent contractors
- Members of partnerships that carry on a trade/business
- Other individuals in business for themselves3
Current Tax Policy
If you are an employee, you might remember taking a home-office deduction in prior tax years. Up until a few years ago, some employees were able to do so. However, this deduction was one of the many individual tax cuts removed in the Tax Cuts and Jobs Act of 2017.4 Unfortunately, that means a lot of workers transitioning to remote work cannot take the deduction.
What if I Qualify?
If you are actually self-employed, you may benefit from taking the home office deduction.
There are two options to calculate your deduction: the actual expense method and the simplified option. The actual expense method requires you to compute your home office expenses. The new simplified option multiplies a prescribed rate by your square footage, along with some other stipulations.5 Regardless of your calculation method, you’ll have to be able to prove regular and exclusive use and demonstrate that it’s the principal place of your business to the IRS.
If you qualify for the deduction, we highly recommend that you consult a CPA or Enrolled Agent who can help you navigate the complexities and optimize your deduction.
What if I Don’t Qualify?
Unfortunately, many workers hoping to qualify for this deduction due to the pandemic won’t meet the requirements. However, you may qualify for other types of deductions. You may be allowed to deduct unreimbursed business expenses from your state income tax, and this might include expenses for home offices if you meet their specific requirements.
Whether you can take the home office deduction or not, you may find that your increased utility cost is more than made up for by your fuel savings from not having to drive to work every day. And if you have out of pocket expenses for your home office, look into your company’s reimbursement policy.
Even though it may feel like we can finally put 2020 behind us, tax filing season is just getting started. Be sure to contact your tax preparer, financial advisor, or employer with any questions so filing your 2020 returns will run smoothly.
Be sure to check out our most recent video, Ken describes Ohio's new educator expense deduction.