If youâre one of the millions of workers whose home is now doubling as office space due to COVID-19, you may be wondering whether that means a sweet deduction at tax time. Hold up, though: The IRS has strict rules about taking the home office deduction â and they changed drastically under the Tax Cuts and Jobs Act, which passed in late 2017.
7 Essential Rules for Claiming a Work From Home Tax Deduction
Thinking about claiming a home office deduction on your tax return? Follow these tips to avoid raising any eyebrows at the IRS.
1. You canât claim it if youâre a regular employee, even if your company is requiring you to work from home due to COVID-19.
If youâre employed by a company and you work from home, you canât deduct home office space from your taxes. This applies whether youâre a permanent remote worker or if your office is temporarily closed because of the pandemic. The rule of thumb is that if youâre a W-2 employee, youâre not eligible.
This wasnât always the case, though. The Tax Cuts and Jobs Act suspended the deduction for miscellaneous unreimbursed employee business expenses, which allowed you to claim a home office if you worked from home for the convenience of your employer, provided that you itemized your tax deductions. The law nearly doubled the standard deduction. As a result, many people who once saved money by itemizing now have a lower tax bill when they take the standard deduction.
2. If you have a regular job but you also have self-employment income, you can qualify.
If youâre self-employed â whether you own a business or youâre a freelancer, gig worker or independent contractor â you probably can take the deduction, even if youâre also a full-time employee of a company you donât own. It doesnât matter if you work from home at that full-time job or work from an office, as long as you meet the other criteria that weâll discuss shortly.
Youâre only allowed to deduct the gross income you earn from self-employment, though. That means if you earned $1,000 from your side hustle plus a $50,000 salary from your regular job that you do remotely, $1,000 is the most you can deduct.
3. It needs to be a separate space that you use exclusively for business.
The IRS requires that you have a space that you use âexclusively and regularlyâ for business purposes. If you have an extra bedroom and you use it solely as your office space, youâre allowed to deduct the space â and that space alone. So if your house is 1,000 square feet and the home office is 200 square feet, youâre allowed to deduct 20% of your home expenses.
But if that home office also doubles as a guest bedroom, it wouldnât qualify. Same goes for if youâre using that space to do your day job. The IRS takes the word âexclusivelyâ pretty seriously here when it says you need to use the space exclusively for your business purposes.
To avoid running afoul of the rules, be cautious about what you keep in your home office. Photos, posters and other decorations are fine. But if you move your gaming console, exercise equipment or a TV into your office, thatâs probably not. Even mixing professional books with personal books could technically cross the line.
4. You donât need a separate room.
There needs to be a clear division between your home office space and your personal space. That doesnât mean you have to have an entire room that you use as an office to take the deduction, though. Suppose you have a desk area in that extra bedroom. You can still claim a portion of the room as long as thereâs a marker between your office space and the rest of the room.
An easy way to separate your home office from your personal space, courtesy of TurboTax Intuit: Mark it with duct tape.
5. The space needs to be your principal place of business.
To deduct your home office, it needs to be your principal place of business. But that doesnât mean you have to conduct all your business activities in the space. If youâre a handyman and you get paid to fix things at other peopleâs houses, but you handle the bulk of your paperwork, billing and phone calls in your home office, thatâs allowed.
There are some exceptions if you operate a day care center or you store inventory. If either of these scenarios apply, check out the IRS rules.
6. Mortgage and rent arenât the only expenses you can deduct.Â
If you use 20% of your home as an office, you can deduct 20% of your mortgage or rent. But thatâs not all you can deduct. Youâre also allowed to deduct expenses like real estate taxes, homeowner insurance and utilities, though in this example, youâd only be allowed to deduct 20% of any of these expenses.
Be careful here, though. You can only deduct expenses for the part of the home you use for business purposes. So using the example above, if you pay someone to mow your lawn or youâre painting your kitchen, you donât get to deduct 20% of the expenses.
Youâll also need to account for depreciation if you own the home. That can get complicated. Consider consulting with a tax professional in this situation. If you sell your home for a profit, youâll owe capital gains taxes on the depreciation. Whenever youâre claiming deductions, itâs essential to keep good records so you can provide them to the IRS if necessary.
If you donât want to deal with extensive record-keeping or deducting depreciation, the IRS offers a simplified option: You can take a deduction of $5 per square foot, up to a maximum of 300 square feet. This method will probably result in a smaller deduction, but itâs less complicated than the regular method.
7. Relax. You probably wonât get audited if you follow the rules.
The home office deduction has a notorious reputation as an audit trigger, but itâs mostly undeserved. Deducting your home office expenses is perfectly legal, provided that you follow the IRS guidelines. A more likely audit trigger: You deduct a huge amount of expenses relative to the income you report, regardless of whether theyâre related to a home office.
Itâs essential to be ready in case you are audited, though. Make sure you can provide a copy of your mortgage or lease, insurance policies, tax records, utility bills, etc., so you can prove your deductions were warranted. Youâll also want to take pictures and be prepared to provide a diagram of your setup to the IRS if necessary.
As always, consult with a tax adviser if youâre not sure whether the expense youâre deducting is allowable. Itâs best to shell out a little extra money now to avoid the headache of an audit later.
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Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.