During our COVID pandemic have you have been forced to turn your dining room into a home office? Now that it appears to be long term, you may be asking “what is eligible for a home office deduction on my federal tax return?” And even though your dog appears with you on a Zoom meeting, he is not deductible.
For most employees who have suddenly shifted to working from home there is no income tax deduction benefit. The Tax Cuts and Jobs Act passed in December 2017 eliminated the tax deduction for employees whose sole source of income comes from a job that yields them a W-2 form at the end of the year, even if they have created the dining room as their new fulltime home office.
However, if you earn self-employment income then you would most likely qualify for the deduction. Here are the determining factors on your tax deduction eligibility:
- Your new home office (i.e. the dining room) must be used exclusively for work. You cannot have your Sunday family dinner in the dining room to qualify for the tax deduction. You need to identify a room or area in your home as your office and use it exclusively for that purpose.
- Your home office is where you might meet patients, clients, or customers for business purposes.
- A separate structure not attached to your home is used as your business office.
- If your office is located within your home, there needs to be space within it that is used to store inventory and product samples for your business.
Expense Deduction Calculation
Indirect operating expenses: Calculate the percentage of your home office to the total square feet of the house. Use that percentage to calculate the portion of your home’s indirect expenses (i.e. utilities, mortgage interest, rent, real estate taxes, insurance, etc.) that can be deducted. See reference IRS Form 8829, Expenses for Business Use of Your Home. Direct operating expenses are 100% deductible (i.e. the cost of carpeting and painting the home office).
Gross Income Limitation, Ordering, and Carryover
Home office deductions are limited to the gross income generated by your business. Keep in mind that deductions are important only if you have business income. If not, in most cases you cannot take the deduction, but you might be able to carry the home office expenses forward in the following year(s) should your business have a profitable year(s). Prop. Regs. Sec. 1.280-2(i)5 requires indirect expenses to be allocated in a specific order:
- Tier 1: Mortgage interest and real estate taxes;
- Tier 2: Allocated expenses that would otherwise be deductible business expenses, such as repairs, maintenance, utilities, and insurance; and
- Tier 3: Depreciation.
The Simplified Method
There is an option for a simpler deduction, in which each square foot of the home office is multiplied by $5, up to a maximum deduction of $1,500. Rev. Proc. 2013-13 offers a safe harbor allowing taxpayers to avoid record keeping of actual expenses. Under this safe harbor, depreciation is not deductible. Residence interest, real estate taxes, and casualty losses are deductible on Schedule A however, there is no carry over provision under the simpler method.
Home Office for Partnership
Business owners in partnership can deduct home office expenses on their individual income tax return (1040), but only if the partner is expected to pay the expense without reimbursement.
The IRS rules that partnership expenses are not deductible on an individual return unless the partnership agreement expressly states that the partner is required to pay for the expense personally without being reimbursed.
S Corporation owners and other employees
Business expenses personally paid by shareholders and that are not reimbursed, are treated as unreimbursed “employee” business expenses, and are not deductible. Under the 2017 Tax Cut & Jobs Act, unreimbursed employee business expense deductions are no longer permitted.
Do you need assistance in determining your home office expense deductions? Please give Felsing LLC a call at 407-412-9299.
*Source: The Journal of Accountancy, Deducting Home Office Expenses by Dayna E. Roane, CPA/ABV, CGMA,
