Chances are you’re either working from home full-time or a few days a week due to COVID-19. Naturally, you may be wondering if you can claim a home office deduction when you file your 2020 tax return. Additionally, you may be wondering what expenses you can deduct and how much. This article covers some of the most common questions related to claiming the home office deduction and deciding which one is right for you.
Who qualifies for the home office tax deduction?
First off, not everyone qualifies for the home office tax deduction. Employees who earn W-2 wages are not eligible, even if their employer does not reimburse them for legitimate work expenses (more on that later). To be eligible for the home office deduction, you must have business (self-employed) income reported on Schedule C of your tax return.
Can I deduct my home office if I work from home?
If you are self-employed and work from home, you can deduct a portion of your home that is used “exclusively and regularly” to conduct business. The key words are exclusively and regularly. Even if you have an office outside of your home where you pay rent, you can still claim the home office deduction if you use part of your home exclusively and regularly for business. If you have a spare bedroom that you use to run your home business, you can take the home office deduction. The word “home” is very loosely defined because it includes a “house, apartment, condominium, mobile home, boat or similar property.” This means that even if you’re a renter, you can still claim the deduction.
How much of the home office is tax deductible?
That depends on the method you use. You can choose between two methods: the simplified method or the regular method.
What is the simplified method for home office deduction?
The simplified method is relatively new and was introduced in 2013. Under the simplified method, you can deduct $5 per square foot of your home up to 300 square feet for a maximum deduction of $1,500. This method is really great because it significantly reduces the burden of maintaining detailed books and records of your home office use as required by the regular method.
What is the regular method for home office deduction?
Under the regular method, which has been around for much longer than the simplified method, you are able to take a greater deduction because you must calculate the percentage of your home you use exclusively for business and multiply that percentage against your home expenses.
What home office expenses are deductible?
Once you have calculated the percentage of your home devoted to running your business, you can multiply that percentage by your household expenses such as mortgage interest, homeowners insurance, utilities, repairs, and depreciation. Pay very close attention to the depreciation because if you sell your house, you will have to recapture the depreciation (whether taken or not) and pay tax on it. This is the hidden cost of the home office deduction.
Did the home office deduction go away in 2018?
The home office deduction did not go away in 2018, but the ability to deduct unreimbursed business expenses did. In the past, if you were a W-2 employee and had unreimbursed business expenses, you could deduct them on your tax return; that was eliminated with the passage of the Tax Cuts and Jobs Act of 2017. Granted, even then there was a high threshold to meet because those expenses had to be more than 2% of your AGI to claim.
Of course, the IRS has special rules for everything. For example, there are different rules for daycare providers and what happens to the depreciation you’ve taken (or should have taken) once you sell your home. In addition, your state may not even conform to the IRS rules so it is extremely important to seek professional advice on your own tax situation.
Navigating personal finances or taxes can be intimidating and confusing, but the team at ACap is here to help. Our advisors are qualified to advise on many complex financial and tax matters including tax planning, real estate, retirement strategies, investment planning, estate planning, alternative assets, and many other financial topics. Contact us today to schedule your free consultation.
