The closing of countless offices due to the pandemic earlier this year left employers with little choice but to adapt to an already growing trend toward remote work arrangements. After months of making the transition, some companies have now decided to ditch the office for good.
Whether your work-from-home arrangement is temporary or here to stay, you probably have questions about the impact of the home office on your 2020 taxes. We’ll discuss the home office deduction, changes in the tax law, and how the home office deduction might apply to your situation.
What is a home office deduction?
If you’re a homeowner or a renter, you may be able deduct expenses related to the use of your home for remote work, but only if you’re an independent contractor or otherwise self-employed. The federal home office deduction may include rent or mortgage (based on the time and space dedicated to work) and other expenses incurred for work purposes.
Standard vs Simplified Methods
There are two methods for calculating your deduction for the 2020 tax year. You can use either the standard method for calculating your deduction or you may opt for the “simplified” deduction method. If you calculate your deduction using both methods, you’ll be able to determine which one is favorable before you file your tax return.
The key difference is that the standard method requires you to work out the percentage of your home’s square footage dedicated to business use, while calculating other expenses such as utilities, repairs, insurance, and depreciation. The simplified method provides for a standard deduction of $5 per square foot of home used for business purposes (up to 300 square feet), but you may still claim itemized deductions such as mortgage interest and real estate taxes on the full Schedule A form.
Form 8829 for the Standard Method
You must use IRS Form 8829 (Expenses for Business Use of Your Home) when using the standard method. You do not have to use Form 8829 for the simplified version.
For certain types of expenses listed on Form 8829, there are two columns: direct expenses and indirect expenses. The former are expenses that you would not have incurred if not for the home office (soundproofing, for example), while the latter are expenses you would have incurred anyway, such as your total rent. You may deduct the total amount of direct expenses, while indirect expenses are based on the percentage of your home used exclusively for work.
Are there any tax deductions available to employees for expenses related to working from home?
Unfortunately, employees are no longer eligible for the home office deduction. Prior to tax year 2018, employees could deduct home office expenses as long as they passed the “convenience of employer” test. So, even if you’re unable to work in an office because of a mandatory shutdown or extra precautions taken by your employer during the COVID-19 crisis, you’re no longer able to take the home office deduction.
The Tax Cuts and Jobs Act (TCJA), passed in late 2017, also eliminated other unreimbursed employment-related expenses, such as professional business license fees, work-related supplies, and travel expenses.
What are the eligibility requirements for the home office deduction on my 2020 taxes if I’m self-employed or an independent contractor?
The home office deduction (aka, Business Use of Your Home) is available to anyone who works remotely as an independent contractor or is otherwise self-employed. However, this does not include profit-seeking activities that are not part of a trade or business. For instance, you may not take the home office deduction if you regularly trade stocks online.
There are a few basic criteria for determining whether you can write off work-from-home expenses on your tax return. To qualify for either method of calculating the deduction, the following must apply:
- Regular and exclusive use. The portion of your home used for remote work may not also be used for personal purposes. A dedicated room or even a portion of a room would qualify, for example, but not the kitchen table.
- Principal place of business. The home office for which you’re seeking a deduction must be the primary place where you do your work, and you must not have another location where you conduct a substantial amount of business.
There are a couple of exceptions to these requirements. You may take the home office deduction:
- If you run a daycare business, regardless of whether the space in question is also used for personal activities.
- For any portion of your home that is used to store inventory or product samples, even if it’s not your principal place of business.
Be sure to take advantage of the home office tax deduction
If you’re working from home this year, as so many people are, then you surely realize the additional expenses that may occur as a result. While preparing and filing your tax returns can be a real hassle, taking the time to understand the home office tax deduction (and eligibility requirements) may help you recoup these expenses. If you have additional questions about this or other deductions, talk to a certified public accountant or ask a lawyer.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.