Home Office Tax Deductions: Is Working From Home Working for You?
Written by: Jenny D. Foley, CPA
Millions of people in the United States continued to work from home during 2021 due to various Covid protocols. While remote work has continued to gain in popularity, there are also an array of costs associated with maintaining a home office. Are any of these expenses tax deductible? The answer is it depends. The IRS allows for a home office deduction in certain instances, but several rules apply.
This article will answer:
- Who is eligible to take the deduction?
- What kind of expenses does the deduction allow?
- How do I claim the deduction?
Who is eligible to take the deduction?
Anyone who is self-employed and files Schedule C on their form 1040 can claim many business expenses whether they work from home or not. They may also be allowed to claim the home office expense if all the criteria are met. It may come as a surprise to many W-2 employees that the related expenses of working remotely are not deductible.
- Before 2018, you could claim an itemized deduction for unreimbursed business expenses, including expenses for the business use of part of your home if they exceeded 2% of your adjusted gross income. This deduction was eliminated by the 2017 Tax Cuts and Jobs Act and will remain in current law until 2025. “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the IRS said in a September 2020 reminder on the home-office deduction.
However, if you were a part of the “Great Resignation” and left your full-time employment to start your own business, qualified expenses can be prorated through the months you were no longer employed. Similarly, if you were a full-time employee but also had a side business, you can potentially claim expenses related to that business and the home office deduction for that business. Additionally, you do not need to be a homeowner to take the deduction, apartments are eligible as are mobile homes, boats, and other similar properties. You can also claim the deduction if you worked in an outbuilding on your property, such as an unattached garage, studio, barn, or greenhouse.
Two main conditions need to be met to qualify for the deduction. The first is “regular and exclusive use.” For example, simply having a desk in your master bedroom would not meet the qualification of exclusive use. The second is “principal place of business”. While you may meet clients at various locations, your home office needs to be the place where all administrative and management activities take place. Examples are billing, scheduling meetings and projects, and keeping books and records.
What kind of expenses does the deduction allow?
There are two ways to claim the home office deduction.
- In the simplified method, you can take $5 per square foot of your home office up to 300 square feet, giving the method an annual $1,500 cap.
- The regular version is a bit more complicated but will allow for some expenses, such as repairs to the office (direct expense) to be written off 100%. Other indirect expenses such as mortgage interest, rent, insurance and utilities will be prorated based on the percentage of square footage of your office space over the entire square footage of your home. Under this method, if your gross income from the business use of your home equals or exceeds your total business expenses you can deduct all your business expenses related to the use of your home. If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited but can be carried forward to 2022. (See IRS publication 587 for further information.)
How do I claim the deduction?
The deduction is calculated on form 8829, Expenses for business use of your home. Frequently Asked Questions and line by line instructions can be found here https://www.irs.gov/pub/irs-pdf/p587.pdf. As always when it comes to taxes, make sure to keep all substantiation documents. In the case of a state or IRS audit, you will need to produce all receipts and calculations.
The tax team at Bouchey Financial Group is here to help you. Please feel free to reach out to us regarding your 2021 tax season questions.
Bouchey Financial Group is a fee-only, fiduciary, financial advisory firm with locations in Saratoga Springs & Troy, NY.
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