Many employees around the globe have found themselves in recent years working remotely or on a hybrid model. Now, at tax time, it’s important for workers to understand the home office tax deduction requirements and the specific deductions they may be eligible to take on their tax forms.
What is the home office tax deduction?
A home office tax deduction is a deduction that eligible workers can take if they have a dedicated in-home office space, which is strictly used for business.
In tax year 2013, the IRS introduced a simplified option to calculate the deduction for home offices, as opposed to their more in-depth regular method. With the simplified method, taxpayers receive a deduction of $5 per square foot used for home business, with a maximum of 300 square feet. Additionally, with the simplified option, all home-related itemized deductions are claimed in full on Schedule A. However, there is no home depreciation deduction available for the years the simplified option is used.
Who is eligible for the deduction?
While more people have been working from home, not everybody will be able to take advantage of the home office tax deduction. According to CNBC, this tax break is for those who are self-employed, freelancers, independent contractors, or gig workers.
Due to the Tax Cuts and Jobs Act of 2017, those who work for an employer in W-2 positions are no longer eligible for the tax break. However, if you worked for an employer but also had a freelance side job or were temporarily self-employed, you can claim the deduction during the months you worked in those positions, although you must have some Schedule C income to be eligible.
[Read more: 4 Things Gig Workers Need to Know About Paying Taxes]
How do you calculate the deduction?
A home office deduction can either be calculated using the standard method or the simplified option. The standard method requires calculations using IRS Form 8829, Expenses for Business Use of Your Home, to deduct your home office expenses. With the simplified option, your home office square footage is multiplied by a predetermined rate set by the IRS.
While the simplified option may be easier, you could be losing out on some additional deductions by not using the standard method. However, the standard method requires more in-depth work, requiring you to calculate all your actual expenses and keep a record of all receipts.
For both methods, the home office deduction can only be used if the portion of the residence is used exclusively and consistently for business purposes.
While more people have been working from home, not everybody will be able to take advantage of the home office tax deduction.
What other expenses are deductible?
Various purchases for a home office can be deducted if they are listed as business expenses on Schedule C. Some examples of “home office” expenses that may be deductible include printers, office desks and chairs, computers and filing cabinets or other storage.
Keep track of all your business expenses and receipts to ensure you can prove your purchases in case of an audit.
[Read more: A Complete Guide To Filing Your Business Taxes]
What is the process for taking the deduction?
Filers will take the deduction in different ways depending on the method used to calculate it. Those who use the simplified method will take the deduction directly on Schedule C when reporting income and expenses for their business. However, those who calculate deductions using the standard method will submit a Form 8829 along with their tax return. After that, they will report the total deduction from the business income on Schedule C.
If your home office expenses are more than your business income for the year, your deduction will be limited, as you cannot make your Schedule C income go below zero using business use of home expenses.
Can you claim the deduction after only a few months of being self-employed?
Even if you were only self-employed for a few months out of the year, you can still claim a partial home office tax deduction. Be sure to only use expenses for the months you were self-employed, or otherwise eligible, to calculate the deduction.
If an eligible taxpayer decides to use the simplified deduction method, they can use the number of months they worked from home to prorate the amount they can deduct. They can also choose to deduct a portion of actual expenses for the months they were eligible for the deduction.
[Read more: Working as an Independent Contractor? These Resources Will Help You Manage Your Taxes]
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