And this may not be temporary. There is much discourse around the fact that the shift to work-from-home (WFH) may be permanent for many. If you are one of the many newly working from home, it might make sense to assume that you’d qualify for a home office tax deduction. But in reality, this tax deduction can prove to be a bit tricky.
What Is a Home Office Deduction?
The home office deduction allows you to translate the expenses of using your home as an office into a tax cut. In other words, it might take into account the fraction of space you use to work, mortgage interest or rent, insurance, utilities, repairs or depreciation.
But there are two requirements for individuals to qualify. First, “A home office needs to be a dedicated area in your home used regularly and exclusively for your business,” said Fay Jasambi, CPA. Second, your home office must be the principal place of business2: ” If you run your business from home, of if you’re self-employed and you do not have an office outside of your home,” according to Ms. Jamasbi.
This is meant to apply to self-employed individuals, not employees. Many freelancers, for instance, take home office deductions. The following are considered self-employed individuals:
- Sole proprietors and independent contractors
- Members of partnerships that carry on a trade/business
- Other individuals in business for themselves3
Under Our Current Tax Policy
Despite increasing deduction amounts, many individual tax cuts were not included in the Tax Cuts and Jobs Act of 2017, such as home office deductions for employees.4 If you’re self-employed, chances are you may already be taking the deduction. If you’re a W-2 employee, however, it’s no longer possible. Unfortunately, that means a lot of workers transitioning to remote work cannot take the deduction.
What if I Qualify?
If you fit into the self-employed category described earlier, and you don’t already, you might be able to take advantage of the home office deduction.
The IRS offers two options to calculate your deduction: the simplified method and the regular option. The new simplified option simply multiplies a prescribed rate by square footage, along with some other stipulations.5 The simplified option “Which takes a $5 per square feet for the area of the work that you have exclusively set aside for your business,” said Ms. Jamasbi. In contrast, the regular method requires you to compute your home office expenses. Again, you’ll have to prove regular and exclusive use, as well as this being the principal place of your business to the IRS.
If you qualify for the deduction, it’s highly recommended that you consult a financial planner or tax professional.
What if I Don’t Qualify?
Many workers hoping to qualify for this deduction due to the pandemic, unfortunately, won’t. Employers are now making plans to return to on-site work, if it hasn’t resumed already. To ensure safety in this gradual transition back to normal, 83 percent of companies are altering safety measures in the workplace.6
There’s some more hope, too, for employees who don’t qualify for the home office deduction. Check if your state deducts unreimbursed business expenses from your state income tax. Some states may deduct expenses for home offices if certain requirements are met. Ms. Jamasbi encourages W2 employees to ask their employer if there is a reimbursement policy for company-related expenses while working from home.