COVID-19 has made many realize that working from home...isn’t too bad. More time to spend with your family, no commute, joining meetings and classes in your underwear. 😳 If you are self-employed, a remote worker, or a small business owner working from home, you may qualify for the home office tax deduction. However, there’s a few important things to note to find out if you qualify and to see how this deduction actually works.
The home office deduction is often cited as an IRS audit red flag (When the IRS reviews your info & accounts to make sure there are no discrepancies in what you’ve reported vs your actual return, in order to abide with tax laws). While this happens for some, in the majority of cases, there is nothing to worry about as long as you truly qualify for the deduction and keep good records.
Tax laws are only growing more and more complex, which is why it’s important to keep good record-keeping for your business. Now this sounds scary, but it’s a lot easier than you might think. Let’s break it down:
What will qualify for a Home Office Tax Deduction?
The most important “rule” with the tax deduction, according to IRS publication 587, is that your space should be “exclusively and regularly” used for work and as your main place of business. Another option is having your home office used “exclusively and regularly” as “a place where you meet or deal with patients, clients, or customers in the normal course” of your business.
So what does this mean for you? Your kitchen counter will likely not count, even if that’s the only place you do work. Unless, of course, you are a chef, and the counter is used exclusively to make money for your business.
Does it need to be a separate room?
While your workspace doesn’t need to be a separate room, it does need to be either a “room or separately identifiable space.” This means that a workspace with a desk, computer, and office supplies in the corner of the room, can count as your primary place of business. A laundry room with just a chair and a laptop in it, might not cut it.
What happens if you have personal decorations, photos, and items? While photos and decorations are ok, it’s important to be mindful of what your decorations are. For example, a dartboard or a decorative arcade game machine would likely be constituted as “personal use”, and therefore disqualifies the deduction.
If you are asking yourself questions such as whether your TV, VCR, and other electronics/equipment will affect the deduction, you have to prove that those items are never used for personal use and have the records to prove it.
What happens if I have multiple locations?
Since many business owners and entrepreneurs might work in different locations such as their coffee shop, it’s important to define what your “principal” place of business is. According to the IRS, your home office must be used exclusively for “administrative or management activities” and further, there mustn't be another location where you also complete “administrative or management activities”.
How often do I need to work in my Home Office?
Since the IRS says your home office needs to be “regularly” used for business, it’s important to determine how often you need to work. Unfortunately, the IRS isn’t very clear about what this means, but they do say that “incidental or occasional” use is not enough. It needs to be the main location where you work. If you find yourself questioning whether or not your home office counts, so will the IRS, so make sure to document your space and its use for proper bookkeeping.
What if I’m an employee? Can I still claim the deduction?
The Tax Cuts and Jobs Act (TCJA) states that from 2018-2025, employees who work from home won’t be able to take the deduction nor deduct their home office expenses. However, as an employee, you can qualify for the deduction if you are required to work from home for your employer’s convenience. If so, you will have to get a statement from your company which explicitly states this. You will not qualify if you’re working from home at your convenience. As a business owner or a self-employed individual however, the deduction is still available to you.
Will the IRS audit me if I take the Home Office deduction?
As amazingly creative as this video is (we may be slightly biased), it’s likely a myth that taking the home office deduction will increase the chances of getting audited. That’s because the majority of those who get audited for taking the home office deduction, likely didn't meet the requirements above, & shouldn't have taken it in the first place! If you find yourself constantly asking if you should or shouldn’t take the deduction then you need to up your bookkeeping game and really consider whether the deduction is for you. If you feel like the Home Office deduction is for you, here’s how you can take advantage of it!
Calculating the Home Office Deduction
There are two methods to take the Home Office Deduction. The traditional way, and the simple way. Most people will take the simple way, so let’s break it down. In order to take the Simple Home Office Deduction, multiply your office’s square footage (limit: 300 square feet) by $5. For example, if you had a 100 square foot office, multiply by $5, for a $500 deduction. This saves you hours of paperwork per year as opposed to the traditional method.
For the traditional way (used during 2012 & before), you must calculate the actual expense of your home office. This means deductions for a home office are based on the percentage of your home exclusively devoted to business use. So, you need to figure out the percentage of your home devoted to the home office. Expenses to consider are mortgage interest, insurance, utilities, repairs, and depreciation. For more information, check out the IRS’s article here.
How can I prepare for a potential audit?
If you’re looking to be careful in the event of a possible audit, there are a few things you can do to substantiate that your space is indeed being used as an office. Make sure to take regular pictures, remove any personal items (even items for your pets or children), and identify the square footage of your “exclusive area”. As always, make sure to consult a professional before making any decisions regarding your taxes.