2020 has been quite a year. The world was hit by the novel coronavirus and most offices implemented work from home ("WFH") policies. In addition to avoiding family members with compromised immune systems to stocking up on enough toilet paper to last a year, those with children found a new level of appreciation for teachers. This article will provide insight into the Home Office Deduction.
Home Office Deduction
Generally, a taxpayer may claim a home office deduction under §Code Sec. 280A(c) if they meet the following:
you maintain an office in your home or use a portion of your home “exclusively” and “regularly,”
you use a portion of your home to store inventory or product samples, or
you use a portion of your home as a “daycare facility.”
Further detail on these three requirements is discussed below. For a refresher of these rules, check out our explainer video here. For additional guidance, please see IRS Publication No. 587 and Figure A.
This article will focus on the first criterion.
Employees do not qualify
If you are an employee, the home office deduction will not be available to you. This is because the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the Miscellaneous Itemized Deduction. Thus, what can you do?
Employee Business Expense Reimbursement Plans
Consider asking your employer to establish an expense reimbursement plan. Under a reimbursement plan, the employer reimburses the employee for various business expenses within defined limits. In exchange, the employee submits detailed expense reports documenting the expenses. It is highly recommended that the employer seeks counsel to ensure the proper procedures and reporting requirements are being met. If done correctly, no portion of the reimbursement amount will be taxable to the employee. The employer can reimburse a portion of the employee’s business expenses, such as home office expenses (including depreciation), small tools, equipment, office supplies, and internet access to name a few.
Non-Employees Home Office Deduction
Non-employees can deduct their home office expenses. However, the amount is limited to a fraction of their interest, taxes, and casualty losses allocated to their home office. To qualify, the business portion of the home must either be used:
“Exclusively” and “regularly” as the taxpayer’s principal place of business; or
“Exclusively” and “regularly” as a place where the taxpayer meets with clients, patients, or customers; or
In a separate structure that is not attached to the home.
The words “exclusively” and “regularly” limits the area to either a room or a separately defined space that is used consistently in a profit-seeking activity (such as a trade or business), and the area must not be used for personal reasons by the taxpayer or other members of the household. It is important to note that those who do not “materially participate” or are passive investors may not claim this deduction.
Two Methodologies
The code allows for two ways to calculate your deduction (1) the simplified method and (2) the actual method. Taxpayers are not required to use the same method from year to year.
Under the simplified method, taxpayers calculate the square footage of the home that is used exclusively and regularly for business and multiply the square footage by five ($5) dollars. The deduction is limited to 300 square feet or $1,500.
Under the actual method, taxpayers must:
calculate the square footage of the home that is used exclusively and regularly for business and then divide that number by the total square footage within the home,
calculate the portion of the year that the area was used as the home office, and
multiply IRS allowable expenses by the ratio calculated in step (1) and (2).
Allowable expenses include depreciation, direct expenses related only to the office portion, interest, taxes, utilities, repairs, and insurance. For a list of allowable expenses, see Publication No. 587.
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