Home Office Tax Deduction
Can You Claim the Home Office Tax Deduction?
Not long after Covid-19 began to spread wildly, companies that were able, changed their operation by having most employees work from their homes. During the month of May, 2020, over 35% of employees were working from home, according to a report published by the Federal Reserve Bank of Dallas.
This was about a 27% increase over the prior month of February, and it appears that the percentage will continue to rise over the coming months. If you are now classified as a full-time remote employee, you may be wondering if you’ll be able to qualify for the home office tax deduction on your 2020 tax return.
Classified as an employee or self-employed?
The eligibility to claim the home office tax deduction can be a bit confusing, and here’s what you need to know about it. At the present time, the most important factor that determines if you can claim it, is your employment status.
If you’re a full-time worker, and your employer controls how you work and what you do, then you’re considered to be an employee. Your wages are reported on a Form W-2, showing gross wages, Social Security and Medicare deductions, and federal and state income tax deducted too.
As a general rule, an employee cannot claim the home office tax deduction, or claim any other expenses that may be job related. This was changed by the Tax Cuts and Jobs Act (TCJA), and is currently in effect through the 2025 tax year.
Whether this will change for this or future tax years is anybody’s guess. Some will say that an employee working from home is already getting a financial break. They don’t have to spend time commuting, nor do they have the expense of transportation or parking. It’s an election year, so anything can happen. But, as of now, a remote employee can’t claim the home office tax deduction.
Let me add one caveat here. There is one type of employee who can claim the home office deduction, and that is someone who is a statutory employee. The IRS lists the types of work that could be classified in this category. We’ll cover this in a future article.
However, if you’re considered to be a contract type worker, with your income reported on a Form 1099-MISC, then you are an independent contractor. In this classification you may qualify to claim the home office tax deduction.
By being able to claim this deduction, you may be able to deduct a part of your utility bill, cable & internet bill, telephone (careful here), and a few other job-related expenses. The IRS allow the detailed cost method or the simplified method.
IRS conditions on what qualifies for a home office tax deduction
The deduction for a home office can be confusing at best, and there are certain rules that you must follow. The first is the office must be the primary place of your business, and the space that you use must be regular and exclusive. In plain words…a kitchen table doesn’t qualify.
The IRS says that the office space can be a part of your home, a barn, garage, as long as you use it on a regular basis and exclusively for the business. Even if you happen to meet clients or customers at some other location, you can still claim the deduction for the home office.
The space used for the home office is calculated as follows: you divide the office space by the entire square foot space of the building to get a percentage. You can look at IRS Publication 587 for a more detailed explanation. (It hasn’t been updated for 2020 as of this writing.)
How you can claim the home office tax deduction
IRS Form 8829 is the regular form that you will use to claim this deduction. It ties in to the Schedule C, self-employment schedule, where you show your income and expenses for a business. Essentially, you can still claim the higher standard deduction instead of itemizing, and still get a tax break for the home office deduction.
The IRS allows you to make a choice when claiming the deduction. You can use the regular method by listing all of your various expenses or you can use their simplified method, which is based on a certain square foot value. The simplified way has a maximum deduction of $1,500, so work it both ways and use the one that benefits you most.
If you’re struggling with this area, and are unsure if you’re doing it right, it might be a good idea to meet with a tax professional. When claiming the home office tax deduction, you need to get it right. If you qualify or not, or you aren’t sure what expense can be used for Form 8829, see a tax professional.