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Understanding A Home Office Deduction While Working From Home

June 23, 2020 Author: Tess Downing, MBA, CFP®, Complete View Financial

Complete View Financial

If the pandemic completely changed what a day at work looks like for you, you’re not alone. 20 percent of working adults have transitioned to remote work due to COVID-19.1 Adapting to this new workspace isn’t easy, particularly with many companies forced to cut pay in order to preserve non-essential employees. And this may not be temporary. There is much discourse around the fact that the shift to work-from-home (WFH) may be permanent for many. If you are one of the many newly working from home, it might make sense to assume that you’d qualify for a home office deduction on your taxes. But in reality, this tax deduction can prove to be a bit tricky.

What Is a Home Office Deduction?

The home office deduction allows you to translate the expenses of using your home as an office into a tax cut. In other words, it might take into account the fraction of space you use to work, mortgage interest or rent, insurance, utilities, repairs or depreciation. There are two requirements for individuals to qualify:

  1. 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.

  2. Principal place of your business: Your home must be the principal location at which you conduct business.

This is meant to apply to self-employed individuals, not employees. Many freelancers, for instance, take home office deductions. 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 themselves
Under Our Current Tax Policy

Despite increasing deduction amounts, many individual tax cuts were not included in the Tax Cuts and Jobs Act of 2017, such as home office deductions for employees.4 If you’re self-employed, chances are you may already be taking the deduction. If you’re a W-2 employee, however, it’s no longer possible. Unfortunately, that means a lot of workers transitioning to remote work cannot take the deduction.

What if I Qualify For a Home Office Deduction?

If you fit into the self-employed category described earlier, and you don’t already, you might be able to take advantage of the home office deduction.

The IRS offers two options to calculate your deduction: the regular method and the simplified option. The regular method requires you to compute your home office expenses. The new simplified option simply multiplies a prescribed rate by square footage, along with some other stipulations.5 Again, you’ll have to prove regular and exclusive use, as well as this being the principal place of your business to the IRS.

If you qualify for the deduction, it’s highly recommended that you consult a financial planner or tax professional.

What if I Don’t Qualify?

Many workers hoping to qualify for this deduction due to the pandemic, unfortunately, won’t. Luckily, employers are now making plans to return to on-site work, if it hasn’t resumed already. To ensure safety in this gradual transition back to normal, 83 percent of companies are altering safety measures in the workplace.6

There’s some more hope, too, for employees who don’t qualify for the home office deduction. Check if your state deducts unreimbursed business expenses from your state income tax. Some states may deduct expenses for home offices if certain requirements are met.

Altogether, don’t be discouraged if you can’t get the deduction. The switch to remote work in response to COVID-19 won’t be permanent.

For more tax planning tips, check out our article here.

https://www.statista.com/statistics/1110076/share-adults-work-situation-covid-19-us/

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf

https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction

https://www.statista.com/statistics/1117286/covid-19-plans-transitioning-back-on-site-work-us-companies/

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