Since the COVID-19 quarantine began many people, including myself, have been forced to work from home. If you didn’t have a home office before the pandemic you may have incurred some costs to set one up. Things like office furniture, upgraded Wi-Fi connections, computer costs, a printer and other supplies may be adding up. Today, I sat down with my favorite tax expert, my dad, Ken Bloom to talk about the home office tax law and how you might be able to qualify for the deduction in 2020.
Question: Dad, tell me the first thing people should know about the home office tax deduction. Can anyone claim it and how has COVID had an effect if any?
Ken Bloom: The first thing people need to know is that the CARES Act and the COVID crisis have NOT changed the rules around the home office tax deduction. The biggest change came in 2017 in the form of the Tax Cuts and Jobs Act which made significant changes as to who can qualify. Before this 2017 change you could claim the deduction regardless if you worked for yourself or an employer either full time or part time. Now you must have self-employment income to qualify and thus, W-2 employees cannot take advantage of the benefit, which is unfortunate for many people right now.
Question: If I am an employee of a business what options do I have provided that I am spending money to be able to work from home?
Ken Bloom: For W-2 employees with no other self-employment income, the best option is to request an expense reimbursement from your employer. Even though they are under no obligation to pay you, they may be willing to reimburse you for some costs. Unfortunately, unreimbursed expenses attributable to the trade or business of being an employee, including those of maintaining a home office, are no longer deductible as a miscellaneous itemized deduction. But, regardless of your employer’s position on the reimbursement, it probably is wise to make a list of all your home office expenses so it’s clear how much you spent to perform your job. You never know, they might consider these factors when determining your next cost of living raise or factor it into your bonus.
Question: Provided that I am self-employed, what are the qualifications for the deduction?
Ken Bloom: There are two pretty simple qualifications as it relates to the home office deduction. The first is that your home office space must be used regularly and exclusively for business and the second is that your home office must be the principal place used for business. So, what this means is that you could use a spare bedroom or even a hallway nook to run the business. You don’t need walls necessarily to separate the office, but the space should be distinct. It is also permissible to use a separate structure, like a garage or studio, as your home office if you use it regularly for business. The other qualifications states that you must use your home as the primary place you conduct business even if it is just for administrative work like scheduling and bookkeeping. However, your home does not have to be the only place you work in. You might from time to time work at a coffee shop or another location and that will not affect the deduction eligibility.
Question: Do I have to work full time in the business to qualify?
Ken Bloom: No, if you work for yourself in ANY business, either full- or part-time, and your primary office location is your home, you have a home office! No matter what you call yourself or your business, if you have self-employment income and do any portion of the work at home, you probably have an eligible home office. You might sell goods and services as a small business, freelancer, consultant, independent contractor, or gig worker. The work you do at home could just be administrative tasks for your business, such as communication, scheduling, invoicing, and bookkeeping. There are many types of solo entrepreneurs that do most of their work away from home and still qualify for a legitimate home office deduction.
Question: Can you deduct direct home office expenses for your business?
Ken Bloom: If you run a business from home, your direct home office expenses qualify for a tax deduction. These are costs to set up and maintain your office, such as furnishings, installing a phone line or painting the walls. These costs are 100% deductible, no matter the size of the office. Usually you will also have costs that are related to your office that affect your entire home. For example, if you’re a renter, the cost of rent, renter’s insurance, and utilities are examples of indirect expenses. You would have these expenses even if you didn’t have a home office. If you own your home, potential indirect expenses typically include mortgage interest, property taxes, home insurance, utilities, and maintenance. You can’t deduct the principal portion of your mortgage payment, which is the amount borrowed for the home. Instead, you’re allowed to recover a part of the cost each year through depreciation deductions, using formulas created by the IRS. Allowable indirect expenses actually turn some of your personal costs into home office business deductions, which may be a reason to pick up a side gig in and of itself.
Question: How do you calculate your home office tax deduction?
Ken Bloom: Essentially there are two ways you can calculate it: the standard method or the simplified method. The standard method requires you to keep good records and calculate the percentage of your home used for business. For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then dividing 120 by 1,200 gives you a home office space that’s 10% of your home. In this example, 10% of your qualifying expenses could be attributed to business use, and the remaining 90% would be for personal use. If your monthly power bill is $100 and 10% of your home qualifies for business use, you can consider $10 of the bill a business expense. The simplified method doesn’t require you to keep any records, which makes it incredibly easy to claim. You can claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.
Question: Which method should I use to calculate my deduction?
Ken Bloom: The simplified method requires you to measure your office space and include it on Schedule C. It works best for small home offices, while the standard approach is better when your office is bigger than 300 square feet. To claim the standard deduction, use Form 8829 to figure out the expenses you can deduct and then file it with Schedule C. Also, you can choose the method that gives you the largest tax break for any year.
Question: Anything else we should know?
Ken Bloom: No matter which method you choose to calculate a home office tax deduction, you can’t deduct more than your business’s net profit. However, you can carry them forward into future tax years. Also, business expenses that are unrelated to your home office—such as marketing, equipment, software, office supplies, and business insurance are fully deductible no matter where you run your business. It’s also usually a good idea to keep a good record of expenses in case of an audit by the IRS. If you have any questions about qualifying business expenses, home office expenses, or taxes, don’t hesitate to reach out to your tax professional or financial advisor. As we always say at Bloom, “money looks better in your pocket than anywhere else”, so make sure to maximize your deductions where you can.