Right now, at least 1 in 3 Americans find themselves working from home due to the Covid-19 pandemic. The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the Home Office deduction through 2025 for W-2 wage earners. This means if you receive a paycheck from an employer, you cannot deduct an expense for working in a designated part of your home. If you have an office outside the home but are now required to work from home due to the pandemic, the pandemic is NOT considered a hardship reason for a Home Office deduction according to IRS regulations.
If you are self-employed, even as a gig worker, the Home Office deduction continues to be available to you. A quick note: To be a qualifying deductible expense, there is a two-question test, and you must meet each one:
- Exclusive & Regular
Exclusive use means you must use a specific area of your home only for your trade or business. The designated area may be a room or other identified space as a separate work area. The space does not need to be marked off by a permanent partition. Regular means the area must be used on a continuous, ongoing, or recurring basis
- Your principal place of business, used regularly to meet with customers
You have no other fixed location where you conduct substantial administrative or management activities. Your home office must be your actual office from which you work and not be in your home as a matter of convenience. In other words, if you have a regular office and then a desk or a room set up in your house, you cannot “double dip” by deducting the space in your home. If you have more than one business operating from your home, each business must pass the two-test rule separately to satisfy the requirements for each business.
[Side note, if you are an Independent Contractor or someone who is charged a “desk fee”, the IRS generally considers these arrangements “Rent a Desk” or short-term arrangements. If you have a designated area in your home, and you can meet the two-test rule, then you may claim the space as a home office deduction. In other words, you may claim both deductions.]
Please Note: Landscaping does not qualify as a deductible expense unless you are a landscaper and you use your home as a display for potential customers.
The two means of deducting a home office are below:
1). The Safe Harbor home office deduction is $5/sq.ft. for up to 300 square feet with a maximum deduction of $1,500 per year. The deduction for the home office is not allowed if your business incurs a tax loss for the year, and it is not allowed to roll over to the next year.
2). If your business requires more than 300 square feet of space, you may use the Actual Method to calculate the allowable home office deduction. These include mortgage interest, real estate taxes, utilities, home repairs, maintenance, etc.; these expenses are deductible to the extent of business usage. In this case, if your business incurs a tax loss for the year, you are permitted to roll over the loss to the next year in which you have a profit for the year.
If you lease or sub-lease an office away from your home and you are self-employed or have an S-Corp., C-Corp., or Partnership, your rent and related expenses is considered an appropriate deduction.
If you have other questions or concerns, please feel to reach out to Killingsworth Spencer in Roswell.