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Do You Qualify for the Tax Benefit of Home Office Deductions?
Are you one of the millions of people working from home during the COVID-19 pandemic? To contain the spread of the COVID-19 virus, many business owners and their employees were required to work from home. After incurring the costs to set up a workstation, you may have noticed that you are using more electricity and water, talking more on the phone, and relying on an extra cost super-fast internet connection to get your work done. How should you treat these extra costs? Have you been wondering whether you can claim a federal tax deduction for home office expenses? Here is what you need to know about qualifying for home office tax deductions.
If You are the Employer…
If you are a self-employed individual, an independent contractor, or a sole proprietor and you use a portion of your home exclusively and regularly for business, you may be entitled to the home office deductions. Expenses such as electricity, gas, water, trash collection, general maintenance, depreciation, repair, insurance, internet, rent, real estate taxes, mortgage interest, and the costs of installing and maintaining home security systems could be included in your home office deductions.
Other specific expenses such as furniture, computers and accessories, and office supplies for your workstation could also be included. Office furniture, your phone system, computers and peripheral equipment, such as a wireless router, desktop camera, and printer, are “listed properties”. Listed properties are items used for both business and personal purposes and must be used more than 50% of the time for business on an annual basis to claim regular depreciation on the business use portion or deduct the entire amount under the applicable expense election/provision. If listed property is not used more than 50% for business, the property can be depreciated only using straight line, a slower method than the regular depreciation, and is not eligible to be deducted under the expensing provisions (section 179 or “bonus”). However, computer and peripheral equipment placed in service after 2017 are removed from the listed property category and eligible for regular depreciation or can be deducted in full under the expensing provisions without the need to meet the 50% business use test.
To claim your deductions, you must use part of your home for one of the following:
- Exclusively and regularly as a principal place of business for a trade or business
- Exclusively and regularly as a place where patients, clients or customers are met in the normal course of a trade or business
- As a separate structure that is not attached to a home and is used exclusively and regularly in connection with a trade or business
- On a regular basis for storage of inventory or product samples used in a trade or business of selling products at retail or wholesale
- As a daycare facility
Once you have satisfied both the “exclusively” and “regularly” tests, you are ready to compute your home office deduction. The amount is computed by dividing the area of the office portion over the total area of the house to come up with a percentage of expenses that can be claimed. This business percentage will then be multiplied by the expenses to come up with the home office deductions. If your home office was not used for the full year, you will need to prorate the amount according to the number of days used exclusively and regularly for business.
If You are a Partner of a Partnership…
If you are a partner of a partnership and use a part of your home regularly and exclusively for partnership business, you may deduct the home office expenses on Schedule E as long as the expenses are expected to be paid without reimbursement under the partnership agreement or firm policy.
Per the Schedule E instructions, such expenses should generally be reported on line 28, column i, as a separate line item amount along with the partnership name and a description of the amount. If the expenses are allowed losses from a passive activity, enter the expenses on line 28 in column g. The notation “UPE” (unreimbursed partnership expenses) should be entered in column (a) of the line item along with the name of the partnership. Form 8829 can be used to determine the appropriate deduction, but the form itself does not need to be filed.
If the partner’s pass-through income is subject to self-employment tax, the partner’s unreimbursed business expenses should be included as expenses on Schedule SE.
Caution: If the partnership pays you rent for the use of your home office, you cannot deduct home office expenses attributable to your home since you are treated as an employee for purposes of the “rental to an employer.” The deductions allowable would be mortgage interest, real estate taxes, personal casualty losses, and unreimbursed business costs for supplies. This rule doesn’t apply to the employer. Thus, the employer’s deduction for the rent paid to you isn’t affected.
If You are a Shareholder of a Corporation…
If you are a shareholder of a corporation (whether a regular “C” or subchapter “S” corporation) and use a part of your home regularly and exclusively for the corporation’s business, you are treated as an employee of the corporation, and no home office expense deductions are permitted.
If You Are a W-2 Employee…
For 2018-2025, employee home office expenses are not deductible at the Federal level, but may be currently deductible as itemized deductions in some states, such as New York. Before the Tax Cuts and Jobs Act (TCJA), a W-2 employee could claim itemized deductions for unreimbursed employee business expenses, including home office expenses, as miscellaneous itemized deductions on Schedule A subject to the 2% limitation. The TCJA temporarily eliminated most miscellaneous itemized deductions at the Federal level. So, under current law, an employee’s home office expenses are generally not deductible on the Federal tax return. After 2025, an employee’s home office expenses may be claimed as miscellaneous itemized deductions at both the Federal and state levels but are subject to very strict rules.
For more information on home office deductions or related topics, please contact Richard Stieglitz or your Anchin Relationship Partner.