COVID-19 and the Home Office Deduction: What you Need to Know

Nicole Cerrone (Aug, 2020)

A large amount of the workforce was sent home indefinitely due to the COVID-19 pandemic changing the way we work, communicate, and live our daily lives. Companies were quickly forced to innovate their operations in order to keep everyone safe. Business owners and employees turned their homes into offices, fighting to keep their businesses afloat. What could this mean for your taxes? The home office deduction allows qualifying taxpayers to deduct expenses for using their homes as their work space.

Who Qualifies?

An employee receiving a W-2 is not eligible to take the home office deduction even though they may be forced by their employer to work from home full time. This was eliminated with the Tax Cuts and Jobs Act for the tax years 2018 - 2025. Only small business owners or self-employed individuals are now able to reap the tax benefit. Individuals must use a portion of their home regularly and exclusively for work; it must be their principal place of business. Both homeowners and renters are able to claim the deduction. Corporate owners may not take the home office deduction and are treated as employees, but they can take a deduction on their corporate tax return for any of their employee's home office expenses that they reimburse. If the expenses are reimbursed at actual cost, it is not taxable to the individual.

What Qualifies as a "Home"?

A "home" includes a house, apartment, condominium, mobile home, or boat. The deduction cannot be used for a hotel or any other temporary accommodation. Any structure on the property, separate from the house, used exclusively for business purposes, also qualifies. The space used for business does not have to be a whole room. A portion of a room or living space can be used for business to qualify for the deduction. Your space does not need to have defined walls, but it must look like an office space where you do all of your work. If the space is used for any other personal reason, the deduction cannot be taken. For example, if you use a spare room as your work space, but it is also used as a guest bedroom, the space does not qualify for the home office deduction. Taxpayers who conduct business outside of their home, but are required to perform administrative or management activities at home, can also claim the deduction. If the home office space is used as a helpful space to do work for your business those home office expenses cannot be deducted, since it is not your principal place of work.

What Expenses Qualify?

Your deduction can be calculated using the simplified method or the regular method. You are allowed to use whichever method yields the biggest tax deduction for you.

Simplified method: For each square foot of business use of your home you may deduct $5. The maximum square footage is capped at 300 square feet and the maximum deduction amount is $1,500. You are not able to deduct your business expenses using this method. This method would most likely be used if your home office space is small.

Regular method: This method prorates your total business expense to calculate your deduction. A percentage is calculated by dividing the square footage of your home used for business by the total square footage of the home. Your home office deductions are then multiplied by this percentage to come to the amount of your deduction on the return. If your home office space is not used for the entire year it must also be prorated based on how many days it was used.

The following expenses may be deducted as home office business expenses:

  • Real estate taxes
  • Home mortgage interest
  • Mortgage insurance premiums
  • Casualty losses
  • Depreciation
  • Insurance
  • Rent
  • Repairs
  • Maintenance
  • Utilities

There is no specific guidance for the situation we are all currently living in. For many individuals, their homes have become their principal place of business for everyone's safety. Given the times, it will be quite hard to argue against using the home office deduction to catch a tax break for qualifying taxpayers. It is always important to keep all records that are used to calculate your deduction. If you would like to discuss any of these qualifications in greater detail or inquire on whether your home office qualifies for a deduction, please feel free to contact your trusted professional at Dermody, Burke & Brown.

 

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.

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