The coronavirus pandemic has changed the employment landscape for many people. More people are now working from home than ever before. But is everyone eligible to take a home office deduction? Not necessarily.
Who Qualifies for a Home Office Tax Deduction?
If you're one of those taxpayers who's now working from home for their employer but you're a full-time employee, you're not qualified to take deductions for a home office. This exclusion would apply even if your employer closed their office and required you to work from home.
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The home office deduction is only available for self-employed small business owners and independent contractors.
Consider also: Can I Take the Home Office Deduction for Remote Work?
What Qualifies As a Home Office?
To qualify as a home office, the IRS requires that your office space be used "regularly and exclusively" for business and be your "principal place of business."
Regularly and exclusively - You must use a portion of your house for the exclusive use of your business on a regular basis. It doesn't have to be a separate room, but it must be a specific part of your home that isn't used for anything else other than your business. It can be a separate structure or a corner of a room, but it can't be a kitchen table where everyone eats.
Principal place of business - Your office must also be a place where you meet regularly with clients or patients, conduct business activities or do administrative tasks. You can still work in different places, if you're an electrician, for example, and do your paperwork in your home office.
You can claim the home office deduction for any place you reside. It could be a single-family home, a condo or even a houseboat. Free-standing structures, such as garages or studios, also qualify as long as the structure is used exclusively and regularly for your business.
Consider also: Calculate the Home Office Deduction: Actual Expense Method
How to Calculate the Home Office Deduction
The IRS offers two ways to deduct your home office expenses.
Standard option - With this option, also called the regular method, you calculate and deduct the actual expenses related to your home office. For example, if you purchased furniture or painted and made repairs to your work area, you can deduct those expenses.
You can also deduct your house expenses in proportion to your office space. Suppose your office takes up 10 percent of the total square footage of your house. You could deduct 10 percent of your indirect home expenses such as mortgage interest or rent, utilities, homeowners insurance, real estate taxes, depreciation and cleaning fees. See IRS Publication 587 for a more complete list of allowable business expenses.
You'll need to file IRS Form 8829 with your income tax return and enter the total of your itemized deductions on Schedule C.
Simplified option - If you don't want to keep detailed records of all your office-related expenses, you can use the simplified method. With this option, you simply deduct $5 per square foot of your office space, up to a maximum of 300 square feet. With the simplified method, you report the deduction directly on Schedule C and include it with your federal tax return.
While the simplified method may be easier, it might not provide the highest deduction. You have to do the calculations both ways and decide if you're willing to keep the itemized records needed for the regular method to get the higher deduction.