Is Your Home Office Eligible for a Tax Deduction?
With the rise of remote work, home offices have become a staple for many professionals. Does your home office qualify for an income tax deduction?
The COVID-19 pandemic accelerated the shift to remote work by about a decade, according to some industry experts. making home offices essential when many workplaces closed in 2020. Some W-2 employees were already partially working from home using existing technology, so you might assume they would qualify for a tax deduction due to the sudden shift to full-time.
However, that's not the case. The Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct unreimbursed employee expenses on federal returns, although some states may still allow these deductions.
You may not be thinking about your 2024 income taxes yet (though we’re big promoters of year-round tax planning). If it turns out that you are indeed eligible for the Business Use of Your Home deduction, we recommend that you get a head start on this element of your tax preparation. What expenses can be claimed, and are there any exceptions? We’ll explore the IRS rules this month.
Who’s Eligible?
Most—but not all—taxpayers who are eligible for the home office deduction are self-employed individuals. To qualify, the portion of your home used for business must be used "exclusively and regularly as your principal place of business." The IRS describes two additional scenarios that would make you eligible:
- A place of business used for meetings with your patients, clients, or customers in the normal course of your trade or business, and,
- A separate structure that is not attached to your home that is used in connection with your trade or business.
This space cannot be used for personal activities. For example, if you're an attorney who uses a home office for work (or some of it) but your family occasionally uses the space for leisure, you can’t deduct the expenses for that space.
If you determine that you’re eligible for the home office deduction, you’ll have to submit a Form 8829 along with your Schedule C and Form 1040.
Other home spaces that might qualify for the home office deduction include storage areas for inventory or product samples and daycare facilities.
Two Methods to Calculate Your Deduction
There are two ways to calculate your home office deduction. You can switch back and forth from year to year.
Simplified Method: This method is straightforward. You'll need:
- The square footage of your home office (not to exceed 300 square feet),
- The gross income from the business use of your home, and,
- Your unrelated business expense total.
Multiply the allowable square footage by $5, then subtract unrelated business expenses from your gross income. The smaller of these two amounts is your deduction. You can't claim a deduction if these expenses exceed the gross income from your home business.
Actual Expenses: This method is more detailed. You must calculate the percentage of your home’s total square footage used exclusively for business. The IRS divides expenses into three categories: direct (fully deductible), indirect (deductible based on the percentage of your home used for business), and unrelated (not deductible).
Whichever method you choose, keep thorough records, either on paper or in a spreadsheet, or in an online financial application. The home office deduction can be a red flag for the IRS and may trigger an audit.
What’s Deductible?
If you opt for the Actual Expenses method, determining your deduction becomes more complex.
Many deductible expenses for business use of your home are percentages of amounts you would enter on Schedule A, such as real estate taxes, home mortgage interest, mortgage insurance premiums, and casualty losses from a federally declared disaster. Other expenses eligible for partial deduction (based on the business-use percentage of your home) include:
- Depreciation (you may need our help with this)
- Insurance
- Rent
- Repairs
- Utilities and services
Changes Could Still Come
There haven’t been any significant changes to the home office deduction for years, but remember that the tax code for the 2024 tax year will not be finalized until Congress concludes its work on December 31, 2024. So, pay attention to news that might come out about any new, related tax legislation.
Additionally, keep in mind that the IRS has numerous exceptions to its rules. If you think you might qualify for an exception or have questions about your eligibility or specific expenses, please contact us. We’ll be happy to help clarify the issues for you. And as we mentioned earlier, we’re proponents of year-round tax planning, for many reasons (including the fact that it could reduce your tax liability). Let us know if you want to get a jump on your 2024 income taxes.
