Due to state restrictions, many taxpayers find themselves working from home. There is a lot of confusion on whether you can take a deduction for home office expenses. Taxpayers may be surprised to find out they don’t qualify for the deduction despite taking a home office deduction in the past.
Employees
The Tax Cuts and Jobs Act (TCAJ) eliminated the deduction for unreimbursed employee expenses for years 2018-2025. This means employees are not allowed to take a deduction for business use of their home.
Self-Employed and Independent Contractors
If you are self-employed or an independent contractor, you may be eligible to deduct some expenses for the business use of your home. There are two requirements taxpayers must meet in order to claim the home office deduction:
- You must regularly and exclusively use part of your home for conducting business
- You must use your home substantially and regularly to conduct business
Partners, who qualify for the home office deduction, can deduct their unreimbursed partnership expenses on Schedule E.
Simplified Method vs Regular Method
Taxpayers who qualify to take the home office deduction have the option to use a simplified method or the regular method. Both options are available to both homeowners and renters.
The simplified method simplifies the calculation and recordkeeping requirements of the allowable deduction.
- A standard $5 per square foot is used to determine the deduction (max sq. footage of 300)
- Depreciation deduction is not allowed
The regular method calculates deductions for a home office based on the percentage of your home devoted to business use. In order to calculate the business percentage use, a taxpayer must calculate the square footage of their home office and the total square footage of their home. The basic formula for business use percentage is square footage of home office divided by total square footage of home.
Eligible expenses include (but are not limited to) the business percentage use of
- Mortgage interest
- Real estate taxes
- Insurance
- Rent (if renting home)
- Certain repairs and maintenance
- Security systems
- Utilities
- Depreciation (if own home)
- Other Direct expenses used in your home office
Your deduction may be limited based on your gross business income. Excess expenses not deducted may be carried forward to the next tax year.
Tips on Home Office Deduction
- Assess whether you qualify for a home office deduction every year
- Keep detailed records of expenses you are deducting that provide the information needed to figure your deduction
- Calculate both simplified and regular method to see which provides a better tax savings