The COVID-19 Pandemic has caused a mass transition of employees to begin working from home. In turn, it has prompted many to question whether they can now deduct the use of their ‘home office’ on their tax return.
While the US tax code does include a home office deduction, in order to qualify the taxpayer must meet strict guidelines. Congress has passed some changes to tax law in response to the pandemic, but as of yet, no adjustments have been made to the home office deduction.
As such, most employees now working from home as a result of the pandemic will likely not qualify.
Who can utilize the home office deduction?
With few exceptions, only taxpayers who file a Schedule C will be able to take the deduction. The Schedule C is used to report income from self employed individuals and independent contractors.
Self-employed individuals and independent contractors must then determine if the office space they use in their home is used exclusively for business purposes. If the space is also used for personal purposes, a deduction will not be allowed.
Lastly, while an individual may have more than one business location, the space in question for deduction purposes must be considered the principal place of business. To determine whether the space qualifies, the IRS considers the relative importance of the activities performed at each location and the amount of time spent at each location where business is conducted.
Three important questions to ask yourself are:
- Do I file a Schedule C with my tax return (Am I Self-Employed or an Independent Contractor)?
- Is the office space I use in my home used exclusively and regularly for business purposes?
- Is the office space I use in my home the principal place of business?
If the answer to the three questions above are all ‘Yes’, it is possible you may be able to utilize the deduction. If not, the deduction will not be available.
How much is the home office deduction?
Assuming all the qualifications are met, there are two methods to determine the actual deduction amount:
- The Simplified Method, which uses an IRS prescribed rate (currently $5/sqft) times the square footage of the home office
- Actual Expenses, which requires the taxpayer to determine the total expenses of operating their home and dividing the amounts between business and personal use. When using this method, it is incredibly important to maintain full, detailed records to substantiate your deduction.
While the COVID-19 Pandemic has caused a large percentage of individuals to begin working from home, it has not expanded the number of taxpayers who qualify for the home office deduction by nearly as much. Prior to deducting your home office space, remember to ask yourself the three important questions listed above.