Jamie Bushart, BridgeTower Media Newswires
With more and more people working remotely, a common question clients asked this past tax season was whether they are eligible to take the home office deduction. This is also referred to as business use of home. The qualifying factors have remained unchanged; however, over the past six years, calculating the deduction and where to take it have changed.
For your home office to qualify, it must meet two basic requirements. First, you must regularly and exclusively use that part of your home to conduct business. This means it is a genuinely dedicated work space and cannot also be used as a toy room, gym and so on. Second, it must be your principal place of business. If you have more than one business location, the home office will qualify if it is used regularly and exclusively for administrative or management activities, such as bookkeeping, or to meet with patients, clients or customers.
If both requirements are met, the next step is to calculate the deduction. The formula starts with determining the percentage of your home that is devoted to business use. This can range from a whole or part of a room to a freestanding structure on the property. The space does not have to be permanently partitioned, but it does have to be separately identifiable. Once the square footage is known, taxpayers have two methods to choose from as the multiplier: the actual expenses or the simplified method.
The actual expenses method has been around the longest. Under this method, taxpayers need to determine and keep record of the direct and indirect expenses associated with maintaining their home office. Direct expenses are those that are only in the area used for business, such as painting or repairs. Therefore, they are deductible in full. Indirect expenses are those that are needed to run the entire house, such as insurance, property taxes, mortgage interest and furnace repairs. Those are deductible based on the percentage of the home used for business. Furthermore, depreciation expense can be taken using the straight-line method over 39 years. Unrelated expenses, such as lawn care and or a bathroom remodel, are not deductible.
Alternatively, starting in 2013, taxpayers can use the simplified method. In accordance with its name, this method was introduced to simplify the calculation and recordkeeping requirements that can be burdensome for small business owners. It uses a prescribed rate of $5 per square feet of home used for business. The area is limited to 300 square feet, which equates to the home office deduction being capped at $1,500 under this method. Like the standard mileage rate, the $5 per square foot multiplier has actual expenses and depreciation built into it. Therefore, if you elect to use the simplified method, these expenses cannot be further deducted.
Each tax year you can choose whether to take the actual expenses or simplified method. Some taxpayers like to run the numbers to see which method is more advantageous, while others prefer the less burdensome simplified method. It is important to note that the simplified method is essentially a safe harbor election, and once it is made for a tax year, it is irrevocable, meaning you cannot later amend to change to the actual expenses method for that same year. Moreover, switching from actual expenses to the simplified method and vice versa from one year to the next is not considered a change in accounting method and does not require filing Form 3115 with your tax return to obtain the IRS’s consent.
In 2018, the Tax Cuts and Jobs Act (TCJA) drastically changed Form 1040, where the home office deduction is taken. Those unaffected by the changes and can still take the home office deduction on their 1040 are self-employed persons and partners in a partnership. Self-employed persons report the home office deduction on either Schedule C or F and complete and attach Form 8829, depending on which of the two methods is selected. Partners report the home office deduction on Schedule E with the line description “unreimbursed partnership expenses.”
Prior to 2018, employees could also take the home office deduction on their 1040 so long as it was for the convenience of their employer, itemized and exceeded 2% of their adjusted gross income. The TCJA has suspended this deduction through 2025, along with most miscellaneous itemized deductions. However, New York still allows for it.
Going forward, employers can help their employees by implementing an accountable plan to reimburse them for their business expenses, including home office. This makes the employee whole (tax-free) and shifts the deduction to the employer. To be considered an accountable plan, the expenses must have a business connection and be timely submitted on a detailed expense report with supporting documentation. This means only the actual expenses method may be used for reimbursement.
For more information on the home office deduction, please see IRS Publication 587.
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Jamie Bushart, CPA, is a manager in Mengel, Metzger Barr’s Department. She may be reached at 585-423-1860 or via email at jbushart@mmb-co.com.
