Home Office Tax Deductions During COVID-19
By Christine Hannemann, CPA, Christineh@squire.com
COVID-19 has impacted many aspects of daily life. On a personal level wearing masks, social distancing, Zoom weddings or rediscovering the concept of a “staycation” has made 2020 a year to remember. Changes have impacted the workplace dramatically, as well. Many see an increasing trend toward remote work options and policies. Some predict an estimate of 25-30% of the workforce will be working-from-home multiple days a week by the end of 2021. [1] Many employees working from home for the first time may be looking forward to claiming a home office tax deduction but will find challenges in doing so under current tax laws. In contrast, self-employed individuals may be able to make the most of this deduction. Let’s take a minute to review the current law.
Employee vs. Self-employed
Anyone who is paid a wage reported on a W-2 is considered an employee. In the past, employees who worked at home for the convenience of their employer had the potential to use their home office expenses as a deduction if they met certain criteria. The Tax Cut and Jobs Act (TCJA) eliminated the deduction for years 2018 -2025 along with all miscellaneous itemized deductions. Maybe employees have upgraded their internet, bought a more comfortable chair, or are running their air conditioning all day as a result of working from home? These may seem like legitimate home office deductions, but under the TCJA, none of the additional expenses are tax deductible.
In contrast, a self-employed individual or independent contractor who receives compensation on a 1099 and runs the business as a sole proprietor is still allowed to take a home office deduction on their tax return if they meet the criteria. This group includes real estate agents, developers, attorneys, accountants, doctors, dentists, consultants, and entrepreneurs. The deduction is restrictive, so it is important to understand the requirements.
Home Office Deduction Requirements
- Principal place of business: The taxpayer must regularly use the home office as their principal place of business. If a professional uses office space to meet clients but then returns home for administrative tasks, this would not qualify as the principal place of business.
- Use the home office exclusively for business: This is often referred to as the exclusive use test. Space used for both personal and business projects would not qualify.
With so many workers now conducting business remotely, they may unexpectedly be sharing an office with family members. It is important to recognize, multi-purpose space such as the kitchen table, dining room, or guest room may not meet the criteria. For example, an office that converts to the guest room, or an office used 9 am to 5 pm for business purposes but after 5 pm is used for online schooling, would not qualify. This does not mean an entire room needs to be devoted to business use, but the space within the room must be exclusively used for business. Exceptions to this test exist, such as an in-home daycare, but the exceptions are limited. If a business owner intends to take the home office deduction, it is important to be aware of the exclusive use test and organize the office space to meet the criteria.
Regular or Simplified Method
Once the first two criteria are met, then a method must be chosen. The regular method has been a customary business deduction for decades, but in 2013 a simplified method was introduced to reduce the burden on small business owners. Both methods base the calculation on the square footage of the home used for the business. The simplified method uses a standard of $5 per square foot to a maximum of 300 square feet. Under the simplified method, there is no depreciation to track nor later recapture, and limits to the home gain exclusion when the home is sold. The regular method will allow a deduction of home office expenses proportionately based on the home’s total square footage.
Evaluating the facts and circumstances would help determine the most beneficial method to compute the home office deduction. The method chosen can flip-flop from one year to the next, but once determined must be used for the entire year. The chart below produced by the IRS can be used as a reference to compare the two methods.[2] The FAQs produced by the IRS are also helpful and can be found online.[3]
Comparison of methods |
|
|---|---|
Simplified Option |
Regular Method |
| Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes |
Same |
| Allowable square footage of home use for business (not to exceed 300 square feet) | Percentage of home used for business |
| Standard $5 per square foot used to determine home business deduction | Actual expenses determined and records maintained |
| Home-related itemized deductions claimed in full on Schedule A | Home-related itemized deductions apportioned between Schedule A and business schedule (Sch. C or Sch. F) |
| No depreciation deduction | Depreciation deduction for portion of home used for business |
| No recapture of depreciation upon sale of home | Recapture of depreciation on gain upon sale of home |
| Deduction cannot exceed gross income from business use of home less business expenses | Same |
| Amount in excess of gross income limitation may not be carried over | Amount in excess of gross income limitation may be carried over |
| Loss carryover from use of regular method in prior year may not be claimed | Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year |
Professional Services Group
If you are wondering if you qualify for a home office deduction, we are happy to review your personal circumstances. We recognize your business has been impacted not just these past few months but will continue to feel the lingering effects of the worldwide pandemic.
At Squire & Company, our Professional Services team specializes in working with business owners who often qualify for the home office deduction. In addition to tax services, we can help with payroll, bookkeeping, financial reporting and a host of other needs. Real estate agents, developers, attorneys, accountants, doctors, dentists, consultants, and entrepreneurs can then focus on their clients, while we handle the accounting functions.
We are here to help. We look forward to working with you as we all navigate the changes brought on by COVID- 19.
[1] Kate Lister, President of Global Workplace Analytics, https://globalworkplaceanalytics.com/work-at-home-after-covid-19-our-forecast
[2] https://www.irs.gov/businesses/small-businesses-self-employed/simplified-option-for-home-office-deduction
[3] https://www.irs.gov/businesses/small-businesses-self-employed/faqs-simplified-method-for-home-office-deduction