New tax laws slash tax deductions for home offices
The media gave lots of attention to how the Tax Cuts and Job Act (TCJA) changed corporate and personal tax rates. Few headlines focused on the significant changes TCJA made to how employees deduct home office expenses.
Home Office Tax Deductions Basics
In the past, employees could usually deduct expenses related to operating a home office. To take the deduction you had to use the space exclusively and regularly for business.
Both self-employed individuals and employees could take this deduction prior to 2018. To qualify for the home-office deduction, employees did need to meet additional requirements (example: the home office needed to benefit the employer).
Folks taking this deduction could claim office-related expenses such as utilities, insurance, property taxes, and mortgage interest. Those qualified for this deduction (prior to this year) could list their home office deductions on Schedule A. To take advantage of this tax offset, the taxpayer’s total miscellaneous deductions had to exceed 2% of the taxpayer’s adjusted gross income.
TCJA Home Office Deduction Changes
While The TCJA did not change the home office rules for self-employed individuals, the new rules eliminate the home office tax deduction for employees. Under this new regulation, taxpayers cannot file any miscellaneous itemized deduction. Everyone takes the same standard deduction. Visit our post on 2018 tax changes for couples to get more info on TCJA deduction changes.
Self-employed taxpayers can still deduct allowable home office expenses. To take this deduction, you will report your qualifying home office expenses on IRS Form 8829, which lists expenses for the use of your home. You will file this form along with your Schedule C (where you list the profit and loss of your business.) At this link, you can read about 2018 tax changes for S-corporations.
Strategies to Compensate for the Deduction Change
For many taxpayers, the new higher standard deduction will compensate for the loss of the home office deduction. The new regulations increase standard deductions to:
- $12,000 for individuals,
- $18,000 for heads of household, and
- $24,000 for married couples filing jointly.
If you will lose significant deductions with this change, here are some strategies you could consider.
Ask your employer for a raise
If you set-up a home office for the benefit of your employer, you could ask for a raise to cover the expenses of operating your home office.
Request expense reimbursement
If you have ongoing expenses related to working at home, see if your employer will allow you to submit an expense report to cover those expenses. To do this you will need to request an “accountable plan” from your employer. The IRS details the rules related to accountable plans here. You will not pay taxes on these expenses as long as you can prove the expenses are for legitimate business activities.
Rent your office to your employer
You could charge your employer rent for the space you use. You can take this approach as long as you and your employer are not related.
Become an independent
You could become a 1099 sub-contractor to your employer. To take the 1099 approach, you will need to make sure you meet the requirements of a subcontractor. You should also carefully weigh the costs and benefits of the change. Do you get other benefits from your employer (401K contribution matches, health insurance, life insurance, etc.)?
If you have questions about how these changes will affect your tax situation, please contact us.