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Working From Home: Understanding Home Office Deductions

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. 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 tax deduction. 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. We've had clients come in who have been writing off their bedroom because they sometimes use their work laptop on the bed. No, you can't do that! (Unless your bed is your primary workspace and you sleep on the couch, and good luck convincing the IRS of that one!)
  2. Principal place of your business: Your home must be the principal location at which you conduct business.2

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 themselves3

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? 

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.

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.

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. California is one of those states, and our income tax rate is pretty high, so this could help you out a bit during tax time. This is true even if you don't itemize expenses on your federal return. 

If you qualify for the deduction and want to know more, give us a call! We kind of love tax details, and this is right up our alley.

  1. https://www.statista.com/statistics/1110076/share-adults-work-situation-covid-19-us/
  2. https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
  3. https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center
  4. https://www.congress.gov/115/bills/hr1/BILLS-115hr1enr.pdf
  5. https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction
  6. https://www.statista.com/statistics/1117286/covid-19-plans-transitioning-back-on-site-work-us-companies/

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.