Working From Home and Wondering if You Can Take a Home Office Tax Deduction? It Depends…

With the start of 2021, many of us have gone from sitting in traffic during daily commutes to commuting to our kitchens, living rooms and, for some lucky ones, an actual home office.

You may be wondering whether you can get a nice tax break under home office deduction rules. You are not alone in asking: Did the CARES Act change the rules? Do I qualify for a home office deduction? Is it even worth it?

For most of us who moved from offices to home in response to the pandemic, the short answer is: No, you don’t qualify for the home office deduction. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the ability of employees who receive W2 forms to deduct home offices. This applies to most of us who typically work for one employer in an office setting.

IRC Section 280A, however, provides an exception to the general rule for those who are self-employed or generate self-employment income from a partnership or another vehicle. (If your business is a corporation, you cannot claim the home office deduction, as the IRS considers shareholders to be employees of the company.)

Requirements:

The IRS generally considers the following items when reviewing home-office deductions.

Exclusive Use. To qualify as a home office, the specific area of the home must be used only for the business. It does not need to be a separate room or permanently partitioned portion of a room. Any "separately identifiable" area can qualify. Does a kitchen table or couch qualify? Depending on the business, there may be an argument for it.

Regular Use. The specific area of the home must also be used for business on a regular basis. Incidental or occasional use does not qualify. A consideration of the “facts and circumstances” surrounding the use determines whether it qualifies as “regular.”

Principal Place of Business. While a business can have more than one business location, a home office must be the principal place of business. The IRS definition allows deductibility when the residence is used exclusively and regularly to conduct administrative or management activities of a business and the residence is the only location where the individual conducts substantial administrative or management activities.

Meet or Deal with Clients and Customers. An office qualifies for the deduction if it is used to physically meet with patients, clients, or customers, and use of the home is “substantial and integral” to the conduct of the business. 

Separate structure: A home office can also qualify for a deduction if it is a separate structure that is unattached to the home and is used exclusively and regularly for the business. The structure does not have to be the principal place of business or a place used to meet patients, clients, or customers.

Calculating the Deduction:

There are two options for calculating the home office deduction: the regular method or the safe harbor method. Either method can be used from year to year. Whichever method you choose must meet all Section 280A requirements to claim any deduction.

Regular method. For the regular method, entered on Form 8829, the total expenses of maintaining the home for the year are added up and multiplied by the percentage of the space in the home that is used for business. The total deduction on Form 8829 carries to Line 30 of Schedule C (sole proprietors and single-member LLCs) or Part II of Schedule E (for partnerships and multi-member LLCs).

Safe harbor method. As an alternative to calculating and allocating actual expenses, individuals can use a simplified safe harbor method to compute their home office deduction. The safe harbor amount equals $5 per square foot of the portion of the home used for business purposes up to 300 square feet, which makes the maximum annual deduction $1,500. With this method, no depreciation or IRC Section 179 deduction is allowed for the portion of the home used for business.

In the past, a home office tax deduction was considered to be a red flag that increased your chances of an IRS audit. But home offices are now more common as a result of changes in technology and the overall increase in people who make a living working online.

There’s no need to fear an IRS audit if you’re following the rules. Just make sure you meet the requirements and keep excellent records. For more information about 2020 tax rules, contact us. We are here to help.

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