Since the beginning of the COVID-19 pandemic, many individuals began working from their homes, as offices and workplaces closed to help prevent the spread of the coronavirus. Now, many workers are wondering whether they can take a home office deduction on their 2020 tax filing. As you might recall, home office deductions were expanded in 1999 to allow more taxpayers to deduct expenses that they incur while operating their business from home. However, the 2017 Tax Cuts and Jobs Act made the deduction unavailable for employees to claim on their Federal return for tax years 2018 through 2025. Self-employed individuals, however, may still be able to claim the home office deduction; and certain states, including New York, still allow the home office deduction for employees. We’ve developed the questions below to help you understand your eligibility for the Federal home office deduction. We recommend that you consult your tax advisor to determine your eligibility under your state’s tax laws.
Determine your potential eligibility for the Federal home office deduction. Answer the following four questions to determine if you are most likely eligible to deduct your home office expenses on your Federal tax return:
- Are you an employee?
- Yes – You are not eligible to claim the home office deduction on your Federal tax return. No need to continue answering these questions.
- No, I am self-employed – You may be eligible. Continue answering questions.
- Do you pay mortgage interest, insurance, utilities, repairs, maintenance, depreciation, or rent for the property that contains your home office?
- Yes – You may be eligible. Continue answering questions.
- No – You are not eligible to claim the home office deduction on your Federal tax return. No need to continue.
- Is your home office your principal place of business? Due to office closures, many taxpayers’ home offices became their principal place of business in 2020. If most customers or colleagues would expect to contact you at your home office (even though you may have sometimes worked in another location), your home office can qualify as your principal place of business.
- Yes, most of my business is conducted at my home office
– You may be eligible. Continue answering questions. - No, my business is primarily conducted at another location, and I occasionally use my home office – You are not eligible to claim the home office deduction on your Federal tax return. No need to continue.
- Is your designated home office space used exclusively for work on a regular basis?
Example 1: If your home office is in your finished basement, do you only conduct business activity in that area, or do you also consider it a playroom for your kids?
-
- Yes, I only use the space for my business (the kids play on the other side of the basement)
- You are most likely eligible. Calculate your home office expense deduction (see below).
- No, the space is not exclusively used as an office, or I do not use it regularly for business. – You are not eligible to claim the home office deduction on your Federal tax return. No need to continue.
- I do not know. Monday through Friday I conduct business at my desk in my finished basement, but on the weekends my kids use my desk to color.
– You are not eligible to claim the home office deduction on your Federal tax return due to the lack of exclusivity. No need to continue. (You may want to consider getting a different coloring table for your kids…)
- Yes, I only use the space for my business (the kids play on the other side of the basement)
Example 2: If you store your business’s inventory in your garage, do you store other personal items in the garage as well?
Yes, I regularly only use the space to store my business’s inventory. You are most likely eligible. Calculate your home office expense deduction (see below).
No, I also store my personal vehicle in the same spot in the garage – You are not eligible to claim the home office deduction on your Federal tax return. No need to continue.
I don’t know. I keep my inventory on one side of my garage, and I park my personal vehicle on the other side – You are most likely eligible. Calculate your home office expense deduction (see below) using either the regular method or simplified method by measuring only the amount of space devoted to your business. Do not use the square footage of your entire garage.
How to calculate your home office expense deduction:
There are two ways to determine your home office expense deduction: the simplified method and the regular method.
Simplified Method: Use a rate of $5 per square foot of business space in the home (maximum size of 300 square feet permitted).
- Measure your home office space in square footage.
- Multiply the square footage by $5.
This result is the amount of your deduction. The maximum deduction is $1,500.00 (e.g., 300 square feet).
Regular Method: The regular method calculates additional home expenses created by the business’s use. Form 8829 is utilized to calculate the deduction and is filed with Form 1040 and Schedule C.
- Calculate the percentage of your home that is devoted to business use.
- Take the area of your home office and divide by the total area of your home.
Ex: Your home office is 12 feet by 14 feet. To find the square footage multiply 12 x 14 = 168 square feet. If your home is 2,000 square feet and you determine your home office space is 168 square feet, divide 168 ÷ 2,000 = .084, meaning, 8.4% of your home is devoted to business use.
- Determine your eligible expenses. Eligible expenses can be direct or indirect:
- Direct expenses are specifically related to the business portion of your home.
- Indirect expenses are related to your entire home and are calculated by multiplying the expense amount by the above-calculated percentage (8.4% in our example above).
- Then follow Form 8829 to determine your allowable expenses for business use of your home.
Situations with Special Rules:
- Sale of your home
- Personal property converted to business use
Businesses with Additional Special Rules:
- Daycares operated out of the home
- Farmers
Structures that are Considered Eligible for the Home Office Deduction:
- House, apartment, condominium, mobile home, boat or similar property, garage, studio, barn or greenhouse.
Structures That Are Not Considered Eligible for the Home Office Deduction:
- Any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.
Eligible Expenses:
- Itemized deductions:
- Real estate taxes.
- Home mortgage interest.
- Mortgage insurance premiums.
- Casualty losses attributed to a federally declared disaster.
- Indirect Expenses:
- Casualty losses not attributable to a federally declared disaster
- Depreciation
- Insurance
- Rent
- Repairs and maintenance
- Security System
- Utilities and Services
- Other Expenses:
- Carryover of prior year’s excess operating expenses
- Carryover of prior year’s excess casualty loss and depreciation
- Depreciation of your home
For more information on this matter, please contact Colleen Bartlett, CFE, Senior Tax Accountant, at Tronconi Segarra & Associates. She can be reached at cbartlett@tsacpa.com or (716) 633-1373.
