The tax deadline to file 2019 income taxes is July 15. Looking ahead to next year many Americans are wondering if the IRS Home Office Deduction qualifies their new WFH setup as a 2020 tax write off.
Surprisingly, only about seven percent of the U.S. workforce enjoyed a flexible workplace before the pandemic hit. This year, roughly a third of the country’s employed workers have worked remotely as companies mitigated mandatory shutdowns and distancing measures.
If you’re one of the millions working from home this year, here’s what you should understand about the home office deduction.
Explaining the IRS home office deduction
The IRS Home Office Deduction says if you use part of your home to conduct business, you may deduct expenses related to the business use of your home. Both homeowners and renters qualify, and all types of dwellings do as well: houses, apartments, condos, mobile homes, and even house boats.
Generally, there are two methods of calculating the dollar amount of the home office deduction:
- The “simplified option,” which allows for $5 per square foot of your home office, for an area up to 300 square feet; and
- The “regular method” wherein you calculate your office as a percentage of your home and write off the appropriate percentage of your home expenses. Say you have a 200-square foot office in a 2,000 square foot home; that means you can deduct 10 percent of your annual mortgage interest, insurance, utilities, phone, and cable bills, and possibly other items.
Does your home office qualify?
For a home office to qualify for a tax deduction, it must meet several different standards
- The office or work area must have “regular and exclusive use” for business purposes. A qualifying home office is not required to be walled off; however, you don’t get to deduct the footage of the entire kitchen if your workspace is the kitchen table. You may count the area consumed by a computer desk, filing cabinets, printer, scanner, and other peripherals for work.
- The home office must be the “principal place of business” – meaning most of the business is conducted there for the tax filing period, although there may be other locations where you work.
And here’s the catch…
Anyone who started working from home this year due to COVID-19, here is some disappointing news. As it stands, you probably do not qualify for the home office deduction because you are a “regular employee”— someone who reports income using Form W2 on their tax return.
If you are a self-employed contractor who has their own business or side hustle and reports income using one or several Form 1099s, then you (or your accountant) likely already know all about the home office tax deduction, as part of Form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C (Form 1040), Profit or Loss from a Business.
Unfortunately, for regular W2 employees seeking the IRS Home Office Deduction, the rules changed with the 2017 Tax Cuts And Jobs Act (TCJA), which removed deductible home office expenses from your tax filing. The TCJA is set to remain in place through tax year 2025.
State income tax deductions for regular employees
But good news! Some states do offer state income tax deductions to regular workers if their company did not reimburse the purchase of any new equipment or improvements to your home office. For example, regular employees in California qualify for a deduction if unreimbursed home office expenses exceed 2 percent of their federal adjusted gross income. New York, Minnesota, Arkansas, and Alabama have similar laws.
For regular employees at the federal level, IRS Publication 529 – Miscellaneous Deductions outlines deductions for any unreimbursed costs of a home office if you work at home forthe “convenience of their employer.” Usually regular employees that WFH simply as a perk granted by their company are disqualified for a home office deduction.
What does this mean for the millions of workers that suddenly shifted to WFH as a result of COVID-19 office closures? It’s an evolving situation, but tax professionals do not anticipate treating home office deductions differently next year as a result of the pandemic pushing much of the workforces into home offices.
Changes to IRS tax code would be needed for regular employees to enjoy the same treatment as self-employed contractors. A strongly worded letter to your representatives in Congress might be your best bet.