Work-life has changed with the pandemic of 2020. Many of us have not set foot in an office in months. While this new work style has upended many aspects of life (ask any parent with school-age kids), it may provide benefits for some folks.
Tax Deductibility of Home Office
As we noted in our blog post on tax breaks for home offices, the Tax Cut and Jobs Act greatly restricted the home office deduction. The home office is a miscellaneous itemized deduction, which the TCJA eliminated for the tax years 2018 through 2025.
In 2020, only self-employed taxpayers can take a home office deduction. Therefore, if your company laid you off this year and you started a new income-earning gig, you may qualify.
Qualification Requirements for Home Office Deduction
To deduct a home office, you must generate income as a sole proprietor, independent contractor (or an owner of certain partnerships). Furthermore, the office must be your principal place for working and used exclusively for that work.
Your Office Doesn’t Need to be a Separate Room
While you can have an entire room in your home designated as an office, it is not necessary to take this deduction. You can deduct space used in a shed, garage, workbench, and even a desk in your kitchen or a corner of your bedroom.
Your Office Must Be Exclusive to Your Business
The key is you exclusively use whatever space you designate as your office for working. You cannot use this space for any other purpose if you want to use the deduction. For example, if you declare an outside shed as your office for a pottery business, you cannot also use that space to store your yard tools.
Be careful if you already had a side-gig and now work in the same space for your employer. For example, Matt a corporate attorney also has a side business of writing wills for clients and uses a room in his home to meet and conduct that business.
Let’s say that Matt’s corporate law firm closed his office and asked him to work remotely. If Matt used the same home-office for his corporate work, he could no longer claim that home office deduction for his will-writing side business. He has negated the exclusivity requirement by using the space for another activity.
How to Determine the Amount of Your Home Office Deduction
You have two options for determining your home office deduction amount.
First: The simple deduction of $5 per square foot
You can take $5 per square foot for up to 300 sq ft of office space. With this method, you do not need to keep receipts or records of actual office-related expenses.
Second: The more complicated method of actual expenses
With this method, you measure the actual square footage of your office. You then compute what percentage that space takes of your overall home. Example: a 750 square foot office in a 2,500 square foot home takes 30% of the space.
You can then deduct 30% of the related expenses, such as mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.
The IRS provides Form 8829 to help you determine allowable office space expenses.
Before you take the actual method of expensing your office space, speak to your accountant. This method can have some tax consequences when you sell your home.
If you need any help determining your office expense, please contact us.