Many of us want to work from home. Even more of us would work from home if it meant there was a guaranteed tax benefit. Unfortunately, unless you are self-employed, this is no longer the case. The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated miscellaneous itemized deductions. In doing so, this may threaten your deductible workspace. Join STA as we explore the home office deduction, recent changes to the tax code, and how to claim the deduction.
According to the I.R.S.:
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters and applies to all types of homes.[1]
To utilize the home office deduction, you must use a portion of your home:
- Solely and frequently as your primary place of business;
- Wholly and repeatedly to you work with patients, clients, or customers in the ordinary course of your trade or business;
- If it is a separate structure separated from your home, but on the same property, it must be used for conducting your business;
- Consistently to store inventory, samples, or similar business property;
- To rent; or
- For use as a daycare.[2]
Additionally, if you use a part of your home, apartment, or another residence, only and consistently for business purposes, you may deduct certain expenses (such as mortgage interest, repairs, depreciation, utilities, maintenance, or rent) from your income. You may reduce your taxable income by the ratio of the expenses that approximates the size of your home office compared to the rest of your home.
Because taxpayers cannot claim miscellaneous itemized deductions anymore, this may represent a significant tax burden for taxpayers who previously deducted a portion of their mortgage, utility, or internet bills as unreimbursed employee expenses.[3] Under the prior tax code, employees who worked from home would deduct a part of their housing expenses. Occasionally working from home will not qualify as regular use and may disqualify your home office. Now, the space you claim as a home office must be a condition of your employment or the principal place of your business. Thus, the kitchen desk where the family computer resides may not make the best candidate for a home office deduction.
Unless working from home is an explicit condition of your employment, under the Tax Cuts and Jobs Act, you cannot deduct home office expenses if you are an employee. Becoming self-employed or an independent contractor may enable you to deduct your home office as an I.R.C § 162 business expense. If you are self-employed, then you may calculate home office expenses under the actual method such as:
- Direct costs such as constructing or remodeling the space used exclusively for your business;
- Indirect expenses such as insurance, property taxes, utilities, mortgage interests, and repairs; and
- A depreciation allowance proportional to the amount of space used as your home office compared to the rest of your residence.
Alternatively, if you use the simplified method, the I.R.S. allows you to deduct $5 for every square foot used as your home office space up to $1,500.
While the TCJA eliminated deductions for unreimbursed employee expenses and miscellaneous itemized expenses, with STA’s experts, you can optimize your taxes without fearing to work from home.
[1] https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction
[2] https://www.irs.gov/pub/irs-pdf/p587.pdf
[3] Sarah O’Brien, A Key Tax Deduction for Telecommuters is Gone. Here are Options for Easing the Pain, https://www.cnbc.com/2019/01/29/a-key-tax-deduction-for-telecommuters-is-gone-options-for-easing-the-loss.html (Published Tuesday, January 29, 2019).
