In addition, the home office deduction<\/a> is somewhat of an \u201chonor system\u201d write-off and one you\u2019ll want to have good records for in the event of an audit. That said, if you qualify under current tax code, you should by all means claim it if doing so makes financial sense. Here are what some seasoned CPAs say are the main points of confusion about this popular deduction and what you should know.<\/p>\n Prior to the sweeping tax reform passed in 2017, W2 or \u201cpaycheck\u201d employees were able to take the home office deduction to some extent if they used the space for their company\u2019s convenience and claimed the deduction\u00a0as an unreimbursed job expense. However, the Tax Cuts and Jobs Act<\/a> (TCJA), which went into effect Jan. 1, 2018, suspended the home office deduction for employees<\/a> at least through 2025.<\/p>\n As of this writing, the home office deduction is limited to what the IRS calls \u201cself-employed taxpayers, independent contractors, and those working in the gig economy<\/a>.\u201d It\u2019s aimed at people, say, running a small consulting business out of their home or freelancers who plant themselves in the same chair every day for their writing business. The fact that you\u2019re telecommuting alone doesn\u2019t qualify you for the deduction. You also must be self-employed.<\/p>\n If you find that you\u2019re spending a good chunk of your own money on items you need to work from home, it couldn\u2019t hurt to ask your employer about reimbursement.<\/p>\n If you\u2019re self-employed or run a home-based business, there are three more conditions that must be met in order to cash in on the home office deduction, per the IRS<\/a>.<\/p>\n Deltrease Hart-Anderson<\/a>, EA, who has provided income tax services for small businesses in South Carolina for more than 20 years, calls it the \u201cPEP\u201d rule (P<\/b>rincipal place of business, E<\/b>xclusive use, and P<\/b>rofits).<\/p>\n Hart-Anderson helps us break it down:<\/p>\n This rule requires you to prove that your home serves as your principal place of business. That might mean holding meetings with clients or customers (in person or virtually), doing computer work, answering emails, taking phone calls, creating and shipping products, or any other activities required to do your job. That\u2019s not to say you can\u2019t duck out every now and then to work at Starbucks, but the IRS is looking for substantial and regular use.<\/p>\n \u201cThe business space you deduct must be used strictly for business purposes, and it usually will not work if you are renting an office elsewhere,\u201d says Gail Rosen<\/a>, CPA, PC, who runs a boutique CPA firm that has been providing tax services for individuals and small business owners in New Jersey for over 35 years. \u201cThe home office cannot be for your convenience.\u201d<\/p>\n The second condition is that you must use your designated home workspace solely to perform your business duties. If you\u2019ve converted a spare bedroom, dining room, garage, or even just a corner of a room into a place to work, you can generally take the home office deduction.<\/p>\n \u201cExclusivity is key,\u201d\u201d explains Hart-Anderson. \u201cThis space can\u2019t double as your kids\u2019 play space when you’re not doing business. Regular can mean essential and frequent. If you sporadically use your office in your home, then this is not a deduction for you.\u201d<\/p>\n To qualify for the home office tax deduction, you must have a business that is profitable in the year for which you\u2019re filing. If your business doesn’t qualify due to lack of profit in one year, you can carry over the deduction to the next year. \u201cHobbies are not profit-seeking endeavors and do not qualify for office use in home tax deductions,\u201d says Hart-Anderson.<\/p>\n The IRS gives you two options for calculating the home office tax deduction: using your actual expenses or the \u201csimplified method.\u201d<\/p>\n This method is based on your actual expenses associated with working from home, and is the more complicated method of the two. Hart-Anderson breaks it down for us:<\/p>\n Step 1: <\/b> Step 2: <\/b> Keeping track of your home office expenses can be tedious and requires a lot of recordkeeping. So some taxpayers may instead opt for the simplified method. With the simplified method<\/a>, you can deduct up to 300 square feet at $5 per square foot of space used in your home office, for a maximum home office deduction of $1,500.<\/p>\n Hart-Anderson offers an example: If you have a 200-square-foot home office, then your deduction would be $1,000 (200 x $5). If you have a 300-square-foot home office, then your deduction would be $1,500 (300 x $5). However if you have a 600-square-foot home office, then your deduction under this method would still be $1,500, the maximum allowed by law.<\/p>\n Your accountant or tax professional can help you crunch the numbers to determine which option will let you recoup the biggest deduction.<\/p>\n If you\u2019ve decided to use the simplified method and take the $5 per square foot of office space, the process is simpler. You won\u2019t need to worry about combing through all of your expenses and figuring out which ones are deductible, and will just deduct a single, flat amount. But if you think the actual expenses method will get you a bigger tax break, you\u2019ll have to itemize your individual work-related expenses.<\/p>\n When figuring out your actual expenses, there will be two categories that are deductible: direct and indirect.<\/p>\n These are expenses that are only for the part of the home where you work, and are 100% deductible. Some examples of direct expenses include:<\/p>\n These expenses are those that partly apply to your home office, but also apply to the remainder of the home. You can deduct these, but only at the percentage of the home taken up by your office or workspace. Some examples of indirect expenses include:<\/p>\n Any expense related to an area of the home outside of the office isn\u2019t deductible. For instance, you won\u2019t be able to write off any portion of your master bath remodel, lawn care services, new patio, or kitchen repair.<\/p>\n Also, if you only worked in your home office for part of the year, you can only deduct your expenses for that time period. So if you didn\u2019t start your business until June, you\u2019ll only be able to deduct expenses for seven months of the year.<\/p>\n If you use your home to provide childcare services or to care for an adult over 65 years of age, you may be able to claim a deduction on the part of your home used to provide that service. The catch is the IRS<\/a> requires you to have a \u201clicense, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.\u201d<\/p>\n Unlike a traditional home office, it\u2019s likely that the areas of the home where you provide daycare services are also used by other people, both during and after your working hours. For that reason, you can only deduct your expenses for the amount of time that those spaces are used solely for your business.<\/p>\n If you\u2019re using the actual expenses method and itemizing your individual expenses, it\u2019s a good practice to keep all of your receipts in case you\u2019re ever audited by the IRS. \u201cAs with all business deductions, I recommend keeping all receipts for at least seven years,\u201d says Hart-Anderson.<\/p>\n If you\u2019re self-employed or a business owner who qualifies for the home office deduction, don\u2019t miss the chance to cash in on the tax savings.<\/p>\n If you\u2019ve opted to use the simplified method, you\u2019ll take the flat-rate deduction on Schedule C<\/a> (Form 1040<\/a>), which reports profit or loss from a business.<\/p>\n If it\u2019s worth the extra time and hassle to itemize your actual expenses, you\u2019ll need to submit Form 8829<\/a> to calculate the total deduction, and then report that amount when you file your Schedule C<\/a>.<\/p>\n Header Image Source: (Gian Paolo Aliatis \/ Unsplash)<\/em><\/p>\n","protected":false},"excerpt":{"rendered":" A massive transition to remote work in the U.S. has elevated intrigue around the home office tax deduction. However, only the self-employed can qualify.<\/p>\n","protected":false},"author":201,"featured_media":21560,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","cybocfi_hide_featured_image":"","footnotes":""},"categories":[343,322],"tags":[],"class_list":["post-21548","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finances","category-logistics"],"acf":[],"yoast_head":"\n![\"An](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/02\/home-office-tax-deduction-employee-666x381.png\")
<\/a>1. Company employees need not apply.<\/h2>\n
2. Make sure your business meets the \u2018PEP\u2019 requirements.<\/h2>\n
Principal place of business<\/h3>\n
Exclusive use<\/h3>\n
Profitable (or Profit-Seeking)<\/h3>\n
3. Pick a route: actual expenses or simplified method.<\/h2>\n
Actual expenses<\/h3>\n
\n<\/b>Determine the square footage of the portion of the home you’re using for business, then divide that number by the total square footage of the entire home. This becomes your usage percentage. For example, if your home office<\/a> is 300 square feet and your total home is 2,500 square feet, then your usage percentage is 12% (300 divided by 2,500).<\/p>\n
\n<\/b>Next, you\u2019ll determine your actual home expenses, based on what is used directly for business and what is used for both business and personal purposes. If an expense is used 100% for business \u2014 such as a new desk for your office \u2014 then you\u2019ll deduct 100% for the business. If an expense is used both for business and personally\u2014such as a housekeeping service that also cleans other rooms\u2014 then you can only deduct 12% of that expense for business. The same goes for expenses that apply to the entire house. For example, if your mortgage interest is $15,000, then you will have a business deduction of $1,800 ($15,000 x 12%).<\/p>\nSimplified method<\/h3>\n
![\"An](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/02\/home-office-tax-deduction-air-conditioner-666x381.png\")
<\/a>4. Understand which expenses qualify \u2014 and which ones won\u2019t.<\/h2>\n
Direct expenses<\/h3>\n
\n
Indirect expenses<\/h3>\n
\n
What\u2019s not covered?<\/h3>\n
5. Know the exceptions for daycare facilities.<\/h2>\n
6. Hang onto your receipts.<\/h2>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/02\/home-office-tax-deduction-forms-666x381.png\")
<\/a>7. Use the correct forms.<\/h2>\n