In the wake of the pandemic, there’s a good chance you worked from home for part or all of 2020. As a result, you might be wondering whether you can at least save some money by writing off your home office.
You wouldn’t be the only one. So if you’ve been working from home and are thinking about claiming the home office tax deduction, read on to find out how it works.
Can Anyone Who Worked From Home Claim The Home Office Tax Deduction?
The short answer: No, unfortunately.
The only people who can take the home office deduction are those who are self-employed, according to Michael Corrente, managing director of the tax group at CBIZ MHM, an accounting and professional advisory firm. That includes sole proprietors and independent contractors.
But if you work for an employer, you can’t claim it, and “that’s anyone who gets a W-2, basically,” Corrente said.
There’s no equivalent deduction for taxpayers who work for an employer, either. They’re essentially out of luck, thanks to a provision in the Tax Cuts and Jobs Act that temporarily suspended the unreimbursed expenses deduction through 2026.
“Even though COVID forced a lot of people to work at home, there’s no special consideration for that because of the rules of the Tax Cuts and Jobs Act,” explained Angela Anderson, a certified public accountant and tax specialist for JustAnswer.
In order for an employee to get reimbursed for their home office expenses, she said, the company would have to have an accountable reimbursement plan and pay employees back directly. But employees are not able to claim those expenses on their tax return.
Home Office Deduction Rules
If you were self-employed last year, there is a chance that you can write off your home office. However, the IRS has some pretty strict rules around how to claim the deduction.
Primary and exclusive use
The first qualification is that you have a space in your home that’s regularly and exclusively used to run your business. “For example, if you have an extra room and that room is used 100% to run your business, then you can qualify for the home office deduction,” Corrente said.
On the other hand, working at the dining room table or a desk in your bedroom doesn’t count. The space has to be used for business purposes only. And if you have an office building or other location that you visit regularly to get work done, you can’t write off your home office since it’s not your principal place of business.
Simplified vs. regular method
The next step is to determine how much your home office costs. There are two options for doing that.
The first is the simplified method. This allows you to deduct $5 per square foot of your office, up to 300 square feet (a maximum $1,500 deduction). “The simplified option is just really easy,” Anderson said. “You don’t have to worry about calculating your expenses and breaking them down.”
Keep in mind, though, that taking the easy option could leave money on the table.
There’s more work involved in the regular method, but there is also no cap. Say your home office is 300 square feet and your total home size is 1,500 square feet. That means your home office is 20% of the house, and you could then write off 20% of the costs of maintaining that office, such as 20% of your rent or mortgage, 20% of your property taxes and insurance, 20% of your internet, electricity and phone bill, etc. That could very well add up to more than $1,500.
The downside of that method for homeowners, Corrente said, is that you will have to recapture any depreciation you wrote-off if you sell your home and pay taxes on a gain from the sale. Regardless of which method you ultimately choose, you should crunch the numbers on both options before deciding.
Fact Or Fiction: Writing Off Your Home Office Could Trigger An Audit
You may have heard the age-old rumor that writing off your home office will trigger an audit by the IRS. Understandably, this may make you wary of claiming it for yourself.
Though it’s mostly a myth, there is a kernel of truth there, according to Anderson. However, it’s not claiming the home office deduction that may catch the attention of the IRS, but filing a Schedule C in general.
“So many people over the years have abused the deductions of being an independent contractor ... they kind of inflated the deductions and the IRS has gotten wind of that,” she said. For that reason, the IRS will tend to examine tax returns for independent contractors and others who file Schedule C with a closer eye.
But don’t let that stop you from claiming the home office deduction ― or any deduction ― if you qualify. The IRS has systems in place to make catching anomalies and red flags much easier, and the number of audits it performs each year has dropped significantly, especially among lower- and middle-income taxpayers. In fact, only 0.54% of individuals with an adjusted gross income between $50,000 and $75,000 were audited in 2018.
As long as you have the paper trail to back up your deduction, you shouldn’t have any issues. “Good record-keeping is mandatory for whatever you’re doing relating to taxes,” Anderson said.