Have you and your employees been locked down at home and working remotely over the past six months? Then I have some good news about the home office tax deduction. And some bad news.
First, the good news.
If you’re self-employed or an independent contractor without an office, then you’ll be able to take advantage of this deduction. Even if you have an office somewhere but you regularly use part of your home exclusively for conducting business, you can take the deduction. If you use your home as your principal place of business, then you’ll qualify. If you conduct business at a location outside of your home (your main office), but you still use your home substantially and regularly to conduct business, then you’ll qualify.
To take the home office deduction, you can use either the simplified option or the standard method. If you use the simplified option, you multiply $5 per square foot for the size of your home office space up to 300 square feet for a maximum of $1,500. If you choose the standard method, you can take a percentage of the actual expenses of your house (rent or mortgage interest, homeowners or renters’ insurance, utilities such as your electric, water and gas bills and even a portion of property taxes and depreciation) based on the square footage of your home office as it relates to your home’s total square footage. In either case, you take this deduction on your Schedule C of your personal tax return. If you select the standard option, you’ll have to fill out Form 8829, which provides the details of your calculation.
Now the bad news.
It’s unlikely – unless you meet the criteria above – that you can take this deduction if you, like your employees, have been forced to work from home due to the pandemic. The IRS specifically addressed this issue in this memorandum for Federal employees, which really applies to everyone. According to Topic No. 509: “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.”
There are two things, however, that could be considered.
One is that if you or your employees are incurring additional, unreimbursed expenses in your home in order to do your work, then those necessary expenses could be deducted on your personal returns. To receive the deduction, you must complete Form 2106, which then flows up to your Schedule A – Itemized Deduction form. Unreimbursed business expenses are considered to be an itemized deduction, which means they’re subject to a limitation. That’s because you can only take advantage of all itemized deductions once they exceed 2% of your adjusted gross income on your tax return. Also, be aware that these expenses are mostly intended to be related to your vehicle and travel for work. However, other out-of-pocket expenses for supplies, publications and items that are specifically needed to work from home may be eligible.
The other consideration is that if you (or your employees) have a side gig or other business that’s independent of your job, and you’re running that side business out of your home, then any home office expenses incurred as part of that may qualify for the home office deduction.
Frankly, there’s not much of a tax advantage for yourself and your employees because you’ve been forced to work from home. Kind of makes you want to get back to the office, doesn’t it?
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