COVID-19 has changed the way many people work and increased the amount of people working from home exponentially. With that in mind, we have been getting a lot of questions about taking the home office deduction. There are some very specific rules in place about who is eligible to claim the deduction, what can be claimed, and how the deduction is calculated. If you think you might qualify, here is a brief overview. Learn what to expect and how to prepare to maximize this deduction.

Who is eligible for a home office deduction?

The biggest issue for eligibility is for employees. Due to changes from the Tax Cuts and Jobs Act, effective in 2018, employee business expenses are no longer an allowable deduction. Therefore, if you receive a W-2, you cannot take a home office deduction.

However, if you are self-employed, you can take the deduction as long as you meet certain criteria.

1. The space being claimed must be regularly and exclusively used for the business. So, for example, having a laptop on the dining room table will not count.
2. The home must be your principal place of business, or at least the only location to perform administrative or management duties. An exception to this rule is allowed if you meet patients, clients, or customers in your home office location despite having another office location.

What can be claimed?

A simplified method is allowed, which allows a home office deduction of $5 per square foot up to a maximum of 300 square feet. Otherwise, you can include all expenses necessary to maintain your house (and therefore the business space in your house): mortgage interest or rent, insurance, utilities, repairs, maintenance, depreciation, homeowner’s dues, pest control, etc.

How is the home office deduction calculated?

If you elect the simplified method, you just multiply your home office square footage by $5. Although, this deduction is limited to business income, meaning the deduction cannot create or increase a loss on the return.

If you elect to claim actual costs, then expenses are reported and the deduction is calculated on IRS Form 8829. The size of the office space is divided by the size of the house itself to calculate a business use percentage. All the expenses are added and multiplied by this percentage to calculate the deduction. As with the simplified method, there are limits as to how much can be deducted if this is creating or increasing a business loss. Unused amounts carry forward and can be applied against income in future years.

This is a very high-level overview of the home office deduction. As with all tax planning, your specific facts and circumstances ultimately determine your eligibility and the amount you can deduct. We would be happy to discuss your situation if you have any questions.