As we ride out the fury of this COVID-19 pandemic, many of us are finding ourselves working from home these days. Therefore, I thought this would be a good time to do a refresher on what qualifies for a home office deduction.
If you are working from home and are an employee, then the home office deduction is unfortunately no longer allowed. The Tax Cuts and Jobs Act eliminated the deduction for unreimbursed employee business expenses starting in 2018. If you have unreimbursed business expenses, you may want to visit with your employer to determine if repayment can be made for those legitimate expenses – or possibly even negotiate an allocation of salary to a reimbursable business expense account.
However, if you are self-employed you can take a home office deduction providing you satisfy the requirements. In order to take the home office deduction, you must have a designated space that is used “exclusively” and on a “regular basis” as your principal place of business or as the place where you meet with patients, clients or customers to transact your business. This space does not have to be a room or even a partitioned-off area, but it does have to be a separate area and used specifically for a home office. For instance, you could have a desk and space of three feet around it which could qualify since it is used solely for your home office. In contrast, the kitchen table cannot be used as your home office since your family eats their meals at the table.
Exclusively means that you cannot use the room for non-business purposes at any time. In other words, you can’t have a room be your office in the daytime and then be used as a bedroom or the kids’ playroom at night. There are two exceptions to the exclusively rule. If you provide daycare services in your home and you have a license, certification or approval as a daycare center under state law, you can claim home office business expenses. The other exception is if you use the office for storage of inventory or product samples that you sell in your business, again you may claim a home office deduction.
Regular basis means that you use your home office often and continually. An occasional use of the home office will not suffice. It does not mean that you have to be in your home office the majority of the time doing your business. For example, a salesperson could be out calling on customers all day and then use her home office to perform administrative and marketing tasks. As long as she has no other fixed location for an office and it is used regularly, then the office would qualify as a home office.
How do you calculate the home office deduction? You have two options. One is the “actual expenses method” and the other is the “simplified method”.
For the actual method, you take a percentage of the home office expenses which include mortgage interest or rent, property taxes, utilities, homeowners’ insurance, repairs, maintenance, depreciation and other home office expenses that you might have. This percentage is usually calculated by taking the square footage of the home office space divided by the total square footage of your house. Note: In-home daycares usually use hours of service rather than square footage.
The simplified method is actually simple which isn’t always true when government “simplifies” a rule! To calculate the deduction with the simplified method, take $5 per square foot of home office space. This cannot exceed 300 square feet or a deduction of $1,500 annually. If you use the simplified method, you can also take 100% of your mortgage interest and property taxes on your tax return on Schedule A, the same as if you did not have a home office. This method can be changed each year, but it is irrevocable for the year that you made the election.
If you are self-employed and work from home, this may be a legitimate deduction that is worthwhile to pursue. However, if you are a W-2 employee, unfortunately you are not able to take a home office deduction, even if you are working from home.
While we are all dealing with and trying to navigate the same COVID-19 storm, many times we find ourselves in very different boats. Therefore, it is important to discuss your specific situation and ask any questions you may have with your CPA or trusted financial advisor.
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