Got a call from an old client today. She asked if all the home-based expenses that she had spent due to working at home because of COVID were deductible. I had to ask her if she was an actual employee. When she told me that she was, I had to give her the bad news – employee expenses are not deductible. Had she been a contractor, and hence self-employed, then they would have been. Then however she would need to pay self-employment taxes, etc.
The IRS has specific rules for deducting expenses related to working from home. Here are the key points:
Home Office Deduction
- Eligibility:
- Exclusive and Regular Use: The space must be used exclusively and regularly for business purposes.
- Principal Place of Business: Your home office must be your principal place of business, or you must use it to meet with clients or customers regularly.
- Types of Expenses:
- Direct Expenses: Costs directly related to the home office (e.g., painting the office) are fully deductible.
-
- Indirect Expenses: Costs for maintaining the home (e.g., utilities, mortgage interest, insurance) are partially deductible based on the percentage of your home used for business.
- Methods of Calculation:
- Simplified Method: You can deduct $5 per square foot of the home office, up to 300 square feet, with a maximum deduction of $1,500.
- Regular Method: Calculate the actual expenses of your home office based on the percentage of your home used for business. This method requires detailed record-keeping.
Additional Rules
- Employee Restrictions:
- For employees, the home office deduction is only available if the home office is used for the convenience of the employer, and the employee cannot have another location to perform their work.
- Note: As of 2018, due to the Tax Cuts and Jobs Act, employees are not eligible to claim home office deductions until at least 2026.
- Self-Employed Individuals:
- Self-employed individuals, independent contractors, and freelancers can claim the home office deduction if they meet the eligibility criteria.
- Record-Keeping:
- Maintain accurate records of expenses, including receipts, bills, and proof of payment.
- Keep detailed records of how you calculate the portion of your home used for business.
- Publication 587:
-
- For detailed guidance, refer to IRS Publication 587, “Business Use of Your Home,” which provides comprehensive information on eligibility, calculation methods, and examples.
Resources
By following these guidelines, eligible taxpayers can accurately claim deductions for their home office expenses, reducing their overall tax liability.
