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Home office tax deduction still available, just not for COVID-displaced employees working from home

Kay home office desk March 2020 cropped
My desk in my home office which I deduct when I file my taxes.

Not that I'm paranoid, but sometimes it seems like unseen others somehow know what's going on in my life.

The latest example is tax related.

Earlier this week, a #TaxTwitter pal asked that social media group about home office tax deductions. Granted, this is not an unusual question since the coronavirus pandemic has meant many of us have been working from home, a lot of us for the very first time.

Today, the Internal Revenue Service issued a tax tip on what taxpayers need to know about the home office deduction.

Coincidence?

Maybe.

Or maybe it's just that the lifestyle changes that COVID-19 has foisted upon us are prompting the same questions.

I'll buy that explanation. For now.

And I'll take it as a sign that we all need the following 6 home office tax deduction questions and answers.

1. Can I claim my home office that I'm using since my employer closed down our regular workplace, but has us still doing our jobs remotely?
No. The IRS is blunt about this option and how it affects most of the pandemic's new salaried but work from home devotees: "Employees are not eligible to claim the home office deduction."

Now I know some of y'all are saying wait a minute, and you have a point. But it's an old tax law point was invalidated by the Tax Cuts and Jobs Act (TCJA).

When that GOP tax reform measure became law in late 2017, it eliminated the Schedule A itemized deduction — the one for miscellaneous expenses — where employees could claim unreimbursed business expenses, including those for a home office as long as it was for the convenience of the employer.

Under current tax law (which, by the way, is set to expire at the end of 2025 if not extended), a home office can be claimed only if it's a job you own and operate, either as your main business or as a side job to supplement (or now in coronavirus time, replace) your earnings as an employee.

This is the basis for not allowing the claim by folks who are temporarily doing their wage-paying office jobs from home.

2. What counts as a home office?
When we think office, most of us envision a separate room. That's what I use, a spare bedroom is where I have my desk, filing cabinets, accessory furniture, etc. that helps me do my writing job.

But that's not the only office definition that the tax law recognizes.

Any structures on your property, such as an unattached garage, studio, barn or greenhouse, also could be the location of your home office.

OK, you don't have a sprawling property with lots of spaces that could be used as a home office. In fact, you don't even have a room to spare. No worries.

You don't have to use a full room as your home office. Tax law says any space that you use, for example, a partitioned off section of a room, may qualify as your home tax-deductible home office as long as it meets a couple of tax rules.

Which brings us to the next question and answer.

3. What is required for the IRS to accept a space as a home office?
Tax law spells out two basic requirements for a legitimate home office.

First, the home office must be used exclusively for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

That exclusive use component is also why you need to be extra diligent if, for example, your business office is a folding table in the corner of a room were other things happen. Make sure your family knows that this only for you to do business and that the table can't be used for other things. No kiddos doing homework. No spouse spreading out and sorting a baseball card collection.

Second, the home office space must be for your principal place of business. This, obviously, is the reason basis for not allowing the claim by folks who are temporarily doing their wage-paying office jobs from home.

But there is a little leeway here. The IRS says you can also meet this principal place of business requirement if you perform administrative or management activities from your home office because you don't have any other. Here's an example of such a situation:

John is a plumber and has his own business. Obviously, John's main work is done at his customers' homes and offices where he installs and repairs plumbing. He writes up estimates and records of work completed at his customers' premises. However, John has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business. This includes such things as phoning customers, ordering supplies and keeping his books.

The IRS says John and anyone else who conducts business outside their home but uses a part of their residence in connection with that business' administrative requirements can deduct allowable home office expenses.

Note, too, that the principal business that you conduct from your home office doesn’t have to be your only source of income.

Say you have a job as an attorney at a firm with offices downtown, but you also make additional money from your separate photography business. You use your home office to take care of the administrative tasks associated with that side hustle pictorial pursuit. That home office used regularly and exclusively for your principal photography business counts for home office deduction purposes.

The IRS created the flowchart below to office some quick guidance on whether you can claim a home office deduction.

Home office deduction claim IRS flowchart

4. What can I claim in connection with my home office?
The biggest write-off here is likely the actual home office deduction. You claim it by filing Form 8829 as part of your Schedule C filing. Schedule C itself is part of your regular individual Form 1040 tax return filing and offers another array of business tax deductions.

But back to Form 8829, which is this week's belatedly (yeah, one of those weeks) featured Tax Form Tuesday document. On Form 8829 you can claim a variety — and portion — of many home expenses, including mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.

Form 8829 business use of home deduction

Of course, you must meet specific requirements to claim these home-related office costs and the deductible amount of these types of expenses may be limited.

The typical limitation is the pro-rata amount of the other home expenses. For example, your home office is fraction of your home's overall space, so you are limited to claiming a fraction of allowable expenses, such as your annual total paid for electricity used.

5. How do I figure the precise amount of home costs that count at home office expenses?
Good news. You get two options here.

The first option is the regular method. Here your home office deductions are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses.

For example, you use a room whose square footage is 5 percent of your home's overall spatial measurement. You paid $2,000 in electricity costs for the full year. You can claim 5 percent of that amount, or $100, as home office utility costs. The same percentage process applies to all similar full-house costs you can claim.

The regular method could offer a lot of valuable home office expenses to claim, but it requires good record keeping in case the IRS questions any of them.

Or you can opt to use the simplified home office deduction method.

This simplified home office deduction method has been available since 2013 and, filling out the 44-line Form 8829, you can use the significantly streamlined worksheet found in the Schedule C instructions. Here a rate of $5 a square foot is assigned for business use of the home calculation purposes and the maximum size for this option is 300 square feet.

That makes the maximum deduction under the simplified method $1,500.

You should choose the method that gives you the best tax break result. The side-by-side table below looks at key differences in the regular and simplified home office deductions:

Comparison of Home Office Deduction Options

Simplified Option Regular Method
Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes Same
Allowable square footage of home use for business (not to exceed 300 square feet) Percentage of home used for business

Standard $5 per square foot used to determine home business deduction

Actual expenses determined and records maintained
Home-related itemized deductions claimed in full on Schedule A Home-related itemized deductions apportioned between Schedule A and business schedule (either Schedule C or Schedule F)
No depreciation deduction Depreciation deduction for portion of home used for business
No recapture of depreciation upon sale of home

Recapture of depreciation on gain upon sale of home

Deduction cannot exceed gross income from business use of home, less business expenses Same

Amount in excess of gross income limitation may not be carried over

Amount in excess of gross income limitation may be carried over

Loss carryover from use of regular method in prior year may not be claimed

Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year


6. I rent. Do I get to claim a home office?
Yes! The home office deduction is available to both qualifying homeowners and renters.

And as for the home in which your home office located, don't just think single-family, quarter-acre lot, heavily mortgaged house.

A home for tax purposes could be a house, but tax law also considers an apartment, condominium, mobile home, boat or similar property as a home as long as these locations have kitchen and bathroom facilities. A home office could be in any of these.

Any structures on the property, such as an unattached garage, studio, barn or greenhouse, also could be the location of your home office.

And while this won't apply to most of us, the IRS warns that we can't claim a home office that's in any part of a property that you use exclusively as a hotel, motel, inn or similar business.

More information: I hope these 6 home office FAQs help you determine whether you can claim this tax break, either now during the coronavirus pandemic or any time you are operating a business. If I missed any questions or didn't provide full enough answers, just let me know by leaving a comment below.

You also can check out IRS Publication 587, Business Use of Your Home; IRS Tax Topic 509 on this subject; and the agency's online FAQs on the Simplified Method for Home Office Deduction.

These earlier blog posts also might be of interest:

If this post and additional resources doesn't take care of your home office queries, I suspect, based on the "coincidental" timing of the IRS' home office deduction tip, that I'll hear about it some other way. (Cue spooky Tax Twilight Zone music!)

Now the not-paranoid me is off to change all my passwords, reset all my online security settings and put tape over my computers' cameras.

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Comments

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Kay Bell

Hey, B Michael. No, the structure itself doesn't have to qualify as a house per se. As long as it's on your overall property and you own it too. And yes, you add that structure's square footage to your home's to come up with the percentage that's deductible. For example, you use a 150 square foot shed in your back yard for business and you have a 1,850 square foot house. That gives you 2,000 square feet of residential property and your shed you use for your business accounts for 7.5 percent of the total square footage. That entitles you to write off 7.5 percent of the overall allowable house expenses. Thanks for the question and thanks for reading. Kay

B Michael

Quick questions - if using a separate structure on the property as an office then:

1) does the stand-alone structure have to have a kitchen and bath to qualify?

2) do you add the sq footage of the stand-alone to the total sq footage of the house to determine % used for calculating deductions? ie stand-alone sf + home sf = total sq ft then stand-alone sf/total sf = % for business deduction?

Thank you.

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