Breaking the Code: Home Office Deduction
By: Tyler Nguyen & Monica Jia, Spring 2020 Interns
With about a third of Americans currently working from home because of COVID-19, we’ve been receiving many inquiries regarding the home office deduction. We had two of our Spring 2020 interns take a deep dive to help shed some light on this commonly misunderstood deduction.
Who is allowed to take this deduction?
Since the Tax Cuts and Jobs Act passed in December 2017, only self-employed individuals are eligible for the home office deduction. If you receive a W-2 at the end of the year, you are not eligible for the deduction.
The home office deduction is reported through Schedule C - a tax form used for self-employed individuals to report their income and expenses throughout the year.
How does the IRS define a “home office”?
The IRS dictates that the space used for the home office deduction must be your principal workplace and used exclusively for business - none of it may be used for personal use. This area could be a place in your home or a separate free-standing structure such as a garage, studio, or barn where you meet with patients, clients, or customers in the normal course of business.
Great! I have an area of my home that I use exclusively for business. What expenses qualify for the home office deduction?
There are two ways to calculate the deduction: the simplified method and actual expenses method.
The simplified method does not require specific expenses to be reported by the taxpayer and calculates the deduction based on square footage. The area of the home office is multiplied by an IRS prescribed rate (current rate is $5). The home office area is limited to 300 square feet or a $1,500 deduction.
Alternatively, a taxpayer can choose to deduct their actual expenses related to their home office. Direct expenses, only for the business area of your home, are fully deductible to the limit of gross income. These may include repairs, painting, etc. for the area. Indirect expenses, which are expenses that help keep your entire home running, are deductible based on the square foot percentage. These include costs that are under an umbrella for the whole home - real estate taxes, home mortgage insurance, rent, utilities, and even depreciation.
Expenses that can also be deducted as an itemized deduction (real estate taxes, home mortgage interest) are includable. If only a portion of the expense is allowed, the remainder of the expense can be taken as an itemized deduction.
In many cases, the simplified method is just that - simple. It may lead to a smaller deduction, but greatly reduces the burden of recordkeeping for the taxpayer.
We hope this has been a helpful summary of the home office deduction. If you have questions regarding your specific situation, please do not hesitate to reach out to us for further information.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.