Post-Covid: Re-explore the Home Office deduction

In a recent notice last week, the Internal Revenue Service reminded individuals to consider taking the home office deduction if they qualify. The benefit may allow taxpayers newly working from home to deduct certain expenses on their tax return. In light of exponentially more taxpayers working from home almost exclusively due to the Covid pandemic, tax advisors should re-explore this valuable deduction with clients.

The home office deduction is available only to qualifying self-employed taxpayers, independent contractors, and those working in the gig economy. Two years ago, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for all employees. So employees who receive a paycheck or a W-2 exclusively from an employer are ineligible for the deduction, even if they are currently working from home.

To avoid taxable compensation, ineligible employees should encourage their employer to set up a written Accountable Plan for tax-free reimbursements. Accountable Plans work on the simple concept that if reimbursement payments to business owners and their employees are properly claimed and documented, they are not taxable to the recipient. Accountable Plans are excellent tools to help a business owner recapture expenses paid on behalf of the company, without fear of the payments being treated as taxable compensation.

Qualifying for a deduction

There are two basic requirements to qualify for the deduction. The taxpayer needs to use a portion of the home exclusively for conducting business on a regular basis and the home must be the taxpayer’s principal place of business.

To claim the deduction, a taxpayer must use part of their home for one of the following:

• Exclusively and regularly as a principal place of business for a trade or business
• Exclusively and regularly as a place where patients, clients, or customers are met in the normal course of a trade or business
• As a separate structure that’s not attached to a home that is used exclusively and regularly in connection with a trade or business
• On a regular basis for the storage of inventory or product samples used in a trade or business of selling products at retail or wholesale
• For rental use
• As a daycare facility

The term “home” for purposes of this deduction:

• Includes a house, apartment, condominium, mobile home, boat or similar property
• Includes structures on the property, like an unattached garage, studio, barn, or greenhouse
• Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn, or similar business

Qualified expenses

Deductible expenses for business use of home normally include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, a taxpayer may not deduct expenses for the parts of their home not used for business; for example, expenses for lawn care or painting a room not used for business.

Claiming the deduction

A taxpayer can use either the regular or simplified method to figure the home office deduction.

Using the regular method, qualifying taxpayers compute the business use of home deduction by dividing expenses of operating the home between personal and business use. Self-employed taxpayers filing IRS Schedule C, Profit or Loss from Business (Sole Proprietorship) first figure this deduction on Form 8829, Expenses for Business Use of Your Home.

The IRS introduced a Simplified Option for deducting home office expenses in 2013. Instead of keeping records of all of your expenses, you can deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. As long as your home office qualifies, you can take this tax break without having to keep records of the specific expenses. Many people choose this way to avoid the recordkeeping requirements, but it will probably come up with a lower deduction than what you would have if you actually went through the expenses.  If you use the simplified method, you take the deduction directly on Schedule C reporting your business income and expenses.

If you choose the standard method, you must submit Form 8829 with your income tax return and then report the total deduction from your business income on Schedule C.  Revenue Procedure 2013-13 provides complete details of this safe harbor method.

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