COVID has changed the way society lives, operates and functions. There has been a major shift in the professional world, specifically, where people call “work.” The rise of COVID saw many businesses opting for a “work from home” initiative, creating a rise in home offices. This has major tax implications both on tax professionals and their clients. Obviously, this has raised a number of questions about the qualifications of a home office, how to record keep and has led taxpayers to seek more information on the deduction.
How to qualify
To deduct home office expenses, a taxpayer must use the space exclusively and regularly:
- As a place of business
- As a place to meet or deal with clients and customers in the normal course of business, or
- In connection with the business if the space is a separate structure from the residence (for example, a detached garage)
For 2018-2025, the home office deduction for employees is suspended by the 2017 Tax Cuts and Jobs Act (TCJA). Only self-employed taxpayers are able to claim the home office deduction from 2018-2025.
Because of the TCJA many employees who work from home and are required by their employer to maintain a home office are no longer able to take an itemized deduction for home office expenses. Some employers are creating an accountable plan to reimburse employees for the cost of these expenses. With an accountable plan, the employee seeks reimbursement from the employer for allowable expenses. The reimbursement is not taxable to the employee and the employer is allowed a tax deduction for the expense.
Information to keep track of
What clients need to keep track of will depend on the method they use to figure the home office deduction. There are two methods to use, the regular or simplified method.
The regular method is more difficult and uses actual expenses. Direct expenses (expenses directly related to the home office such as painting or repairs, depreciation deduction for furniture and fixtures used in the home office, etc.) are allowed in full and indirect expenses (expenses related to the home such as mortgage interest, property taxes, insurance, utilities, general home repairs) are deductible based on the percentage of the home used for business. Under this method, the taxpayer is required to depreciate the value of their home and so the value of the home will be needed.
For the simplified method, actual expenses are not deducted. The square footage used as a home office (up to 300 square feet) is multiplied by a prescribed rate ($5 per square foot). The maximum deduction under the safe harbor is $1,500 ($300 x $5).
If using the regular method, all expenses would need to be tracked. If using both simplified and regular, they would need to know the square footage of space used for the home office.
The taxpayer should keep detailed records of all expenses related to the home office and provide a copy or a listing to the tax preparer. All the items mentioned above would be needed – mortgage interest statement, etc.
It is important to note that the simplified method is an alternative only for calculating the amount of the home office deduction. All the other requirements must be met, including the exclusive and regular use requirements, the deduction is limited to income from the business and the restrictions on employees attempting to claim the home office deduction.
What else to know about the deduction
The home office deduction is available to both homeowners and renters, though specific requirements must be met. Even then, the deductible amount be limited.
- House, apartment, condominium, mobile home, boat or similar property
- Includes structures on property such as 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
Expenses that relate to a separate structure not attached to the home will not qualify for a home office deduction. It will qualify only if the structure is used exclusively and regularly for business.
If the home office is the taxpayer’s principal place of business, the costs of travel between the home office and other work locations in that business are deductible transportation expenses, not nondeductible commuting costs.
If the home is sold at a profit, the exclusion of the sale for gain on the sale of a principal residence won’t apply to the portion of the profit equal to the amount of depreciation claimed on the home office.