Updated: Oct 27, 2020
Now entering stage left, the Home Office Deduction
The Home Office Deduction is back. This always-popular tax write-off lets you reduce your taxes based on costs attributable to the space you use when you work from home. Although this write-off has been a hot topic for decades, it has resurfaced in 2020 with the global pandemic forcing nearly 45% of the US workforce to work from home, according to one Stanford University Economist.
Does this apply to me? Please say yes.
Unfortunately, if you’re an employee who receives a W-2 at the end of the year, the answer is no. Although this actually used to be a tax-saving option for employees before 2018, congress said “Nope, not anymore” when it came to the Home Office Deduction as part the tax reform overhaul. Congress must not realize how tough it is working from a make-shift table in your bedroom and trying to keep your dog quiet during phone calls with your manager.
So who does it apply to then?
This tax-saving opportunity applies to people who collect income in connection with a trade or business. If you’re unsure of whether your side hustle qualifies as a trade or business, check out our short write-up, Do I Run a Small Business? Or is This Just a Hobby? The IRS Weighs In…
Okay I qualify? What do I need to know?
If you do qualify for the Home Office Deduction in 2020 or think you may qualify in the future, here are some things to know. The general rule is that you must use a portion of your home exclusively and regularly for business.
· What does “Exclusively for business” mean? The IRS is actually very strict on this. It means this space can’t be used for personal use. It also means that if you are an employee with a side hustle that qualifies, do not do any of your main employer’s work at the side-job spot at home for which you are planning to take the Home Office use Deduction. If you do, the deduction is not allowed for your side job.
· What does “Regularly for business” mean? Generally, a taxpayer must spend substantial amounts of time working in the office on a periodic basis to meet the test. For example, let's say you have a guest bedroom that wasn't used by any guests this year, but you walked in there with your laptop a couple times to send an email, you may argue that it "qualifies" for exclusive test, but it does not meet the regular-use test. Therefore, you would not be able to claim the deduction.
So you’re telling me there’s more?
Okay so you made it through round 1 of the IRS’ regularly and exclusively test. What’s next? In addition to the regular and exclusive-use tests, the home office must also meet at least one of the following three criteria:
· It is your principal place of business, meaning you have no other fixed location where you perform administrative or managerial activities for this business
· It is used to meet with patients, clients, or customers in the normal course of your trade or business
· You operate your trade or business out of a separate structure (like a stand-alone shed in your backyard) that is not attached to your home. This set-up is very helpful with proving that the space is used exclusively for business.
Exceptions to the rules and general advice
There are certainly exceptions to the rules such as using your home space as a daycare facility or as a place to simply store inventory. If you think either of those could apply to you, contact your accountant for more information.
The calculation of the write-off can actually be done in two ways - the simplified method and the regular method. Without getting too deep into those, the simplified method is probably something you could calculate on your own. But don't be fooled by the word "regular" as this second method can get complicated. It requires good bookkeeping and could have some depreciation implications if you plan to sell the home in which you are claiming the deduction. Either way, talk to your accountant first as it may serve you well to determine which of the two methods actually saves you the most money.
If you have questions about how you can take advantage of the Home Office Deduction, feel free to contact us at firstname.lastname@example.org.