Home office deductions have long been a perk for freelancers and other self-employed people during tax time. Those who use their home office space exclusively for work and don't maintain an office elsewhere can write off the costs of keeping that space reserved for business.
Now, with many more people working from home due to social distancing during the coronavirus pandemic, will those who used to work in the office be able to take advantage of the home office deduction?
The short answer to that question is "no." Read on to learn why.
Can work-from-home employees claim tax deductions for home office?
Before the Tax Cuts and Jobs Act of 2018 made sweeping changes to the federal tax code, employees who worked from a home office could claim the deduction. Since rules changed, however, employees are no longer able to write off their home office space.
Accordingly, employees who are now unexpectedly doing business from their desk or kitchen table are not eligible for a tax deduction for a home office.
"Assuming nothing changes in the tax code, there are no laws that are passed to account for all the people working from home. The current law states that you cannot deduct any expenses related to work if you're a W-2 employee," says Riley Adams, a licensed CPA in Louisiana and founder of Young and the Invested, a personal finance site for young professionals.
"If you're working from home and you have to buy a monitor, keyboard, office chair, none of that is deductible unless you have a business that you run out of your home, and all of this is used exclusively for your business," Riley explains.
The best employees can do is ask their employers about reimbursement for any necessary expenses—either the cost of dedicating floor space to work or the price of needed equipment such as a monitor, desk chair, or online tools. Employers have an incentive to reimburse, as they can claim deductions for those costs.
Business-related tax deductions generally aren't designed for employees who work on a W-2 basis. These tax savings are meant to help self-employed people shoulder the costs that employers usually bear, including appropriate, dedicated office space. While the need to work from home due to the pandemic seems like a good reason for an exception to this rule, a change in the tax code would be necessary to give work-from-home employees that break.
What is the home office deduction?
To qualify to deduct the expenses related to your home office from your taxes, you must use your home office regularly and exclusively for business, as well as maintain it as your principal place of business.
Only the amount of space you actually dedicate exclusively to work can be counted. If you work from a desk in the corner of the bedroom, you can deduct only the floor space that holds the desk and other office equipment, but not the entire bedroom. If you also use the desk as a space to do artwork as a hobby, you can no longer claim the deduction, as the space doesn't meet the exclusive-use standard.
"Be ready for an audit by taking a photo of how your home office is laid out," advises Luke Frye, a certified public accountant (CPA) and co-founder of Timber Tax Accounting. "Also, be sure to actually measure the space."
The home office space you deduct must also serve as your principal place of business. If you have another office somewhere else or get business mail delivered to another address, you can't claim the deduction.
"Don't be afraid to take the home office deduction if you rightfully qualify for it," says Frye. "That's what it's there for."
How to calculate tax deductions for home office
If you do qualify to take a deduction, there are two approaches to calculating a home office deduction: simplified and regular. Both methods are based on the square footage of your office space.
To calculate your deduction using the simplified method, take that square footage and multiply it by the standard rate ($5 per square foot for up to 300 square feet of space, in 2019).
The regular method of calculating the deduction is far more complex and requires robust record-keeping. The calculation is based on the specific costs of preparing and maintaining your home office. This includes direct costs that pertain directly to the office space, such as repairing the office door, as well as indirect costs that apply to the office and to other parts of the house, such as paying your mortgage and heating the home.
You are free to use whichever method of calculation saves you more money. However, consider whether the amount you might save using the regular method is worth the extra work and record-keeping required.
"You'd need to calculate either situation to see which one's more advantageous," says Adams.