The number of people who work from home exploded in 2020 because of the COVID-19 pandemic. Some people will be able to take a tax deduction for their home office expenses, but many will not. The law changed in 2018 and eliminated the home office deduction for people who work for an employer. You can only qualify for the home office deduction now if you’re self-employed. You’re not eligible if you’re an employee, even if you’ve been working remotely and had to set up an office in your home.
“I had to explain to a client why she, as an employee, lost the deduction and yet her husband, who was a freelancer, kept his,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut, who is authorized to represent taxpayers in front of the IRS. He says that some employers have been mistakenly telling employees that they can deduct their expenses to set up a home office when their employer closed their office building and had the employees work remotely. If you’re an employee, these expenses are not tax-deductible. “They can’t take the deduction,” he says.
But you may be eligible for the home office deduction if you have any income from self-employment – whether you’re a freelancer or had a side gig last year, if you are starting your own business, or even if you did self-employed consulting work for a few months between jobs. The rules are strict for the office to qualify. Here’s how to find out whether you’re eligible for the break and what expenses you can deduct.
Who Is Eligible for the Home Office Deduction?
Self-employed people can deduct their home office expenses from their business income if their office qualifies. This includes people who work from home full time, as well as people who have a freelance side gig – even though they may also work for an employer – and people who were self-employed for just a few months.
For example, if you did some consulting for a few months while looking for a full-time job, you can take the home office deduction for the months when you were self-employed and working from home. You must have some Schedule C income from self-employment to be eligible to take the home office deduction.
Does Your Home Office Qualify for the Tax Break?
Your home office must also meet certain standards to be eligible. To qualify for the home office deduction, you must use part of your home “regularly and exclusively” for business. Your office doesn’t need to be in a separate room, but it has to be in an area of your home where you don’t do anything else. It can be a dedicated nook in the corner of your basement, for example, but it can’t be the kitchen table where your family also eats.
“There doesn’t have to be a wall that cordons it off – if you have an area that is designated as your home office and nothing else is done in that area, you have an exclusive area,” says Trish Evenstad, an enrolled agent and president of Evenstad Tax and Financial Services Inc. in Westby, Wisconsin. “It may be just your desk and 5 feet around it in your basement. But if it’s your kitchen table and your family eats dinner there, too, you just lost the deduction.” There are special rules for day care centers and inventory storage.
The space must also be your principal place of business or a place where you meet regularly with clients or patients. It doesn’t have to be the only place where you do work – it can be the place where you usually do administrative activities for your business, for example. “If you’re a plumber and you work in different places but your administrative work is always done in that home office, then that would qualify,” says April Walker, a certified public accountant and the American Institute of CPAs’ lead manager for tax practice and ethics.
How Do You Calculate Your Home Office Deduction?
There are two options for taking the deduction. The simplified option is easier but may result in a smaller tax break. The standard option requires more complicated calculations and recordkeeping but could give you a larger deduction. “To maximize the home office expense, they should calculate the expenses under both methods each year and determine which option yields the higher expense,” says Jean Wells, a certified public accountant and associate professor at the Howard University School of Business. You can change the method from year to year.
The Standard Option: With this method, you deduct your actual expenses. You can deduct 100% of some of your home office expenses, such as the cost to paint or make repairs to that specific area. You can also deduct a portion of some overall house expenses based on the area of your home that you use as a home office. For example, if your home office is one-tenth of the square footage of your house, you can deduct 10% of the cost of your mortgage interest or rent, utilities (such as electric, water and gas bills) and homeowners insurance. You can also deduct 10% of other whole-house expenses, such as cleaning and exterminator fees.
You can also deduct a portion of your property taxes and depreciation on the home. Those calculations are complicated, but the instructions to IRS Form 8829 can help, says Chris Hesse, a certified public accountant and principal with the National Tax Office of CliftonLarsonAllen LLP in Richland, Washington. For a list of eligible expenses, see IRS Publication 587. Keep receipts of these expense in your tax files.
The Simplified Option: The IRS introduced a simpler option for deducting home office expenses in 2013. Instead of keeping records of all of your expenses, you can deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. As long as your home office qualifies, you can take this tax break without having to keep records of the specific expenses.
“Many people are choosing this as a way to avoid the recordkeeping requirements, but it will probably come up with a lower deduction than what you would have if you actually went through the expenses,” says Hesse.
How Do You Take the Deduction?
If you use the simplified method, you take the deduction directly on Schedule C reporting your business income and expenses. If you choose the standard method, you must submit Form 8829 with your income tax return and then report the total deduction from your business income on Schedule C.
Your deduction may be limited if your home office expenses are more than your business income for the year. “The business use of home expense can not make the Schedule C income go below zero,” says Evenstad. “If there is unused business use of home expenses, it will carry over to the next year as long as the regular method is used. If the simplified method is used then the carryover is disallowed.”
What if You Are Self-Employed for Just a Few Months?
If you were self-employed for just a few months – for example, if you did some consulting while looking for full-time work – then you may be able to take a partial home office deduction. “If the taxpayer is self-employed for only part of the year, then they must use expenses only for the months that they were self-employed to calculate their home office expense deduction,” says Wells. “For example, if the taxpayer did consulting work from their home office from August to December, then the home office expenses would be prorated for the five months that they worked from home.”
If you use the simplified deduction of $5 per square foot (up to 300 feet), you can prorate the amount based on the number of months you worked from home. For example, if you worked from home for five months and your home office was 300 square feet, you can take a $625 home office deduction, says Wells. (If your home office is 300 square feet or larger, you can deduct $125 for each month that you work from home.)
Or you can deduct a portion of your actual expenses (such as mortgage interest or rent, utilities and homeowners insurance, based on the percentage of your home’s square footage that you use as a home office) for the months when you’re working from home.
No matter how long you work in the home office, the space must be regularly and exclusively used for business during those months. Keep this requirement in mind if you’re setting up a temporary office in your home, even if you don’t plan to start your own business permanently: It doesn’t have to be a separate room, but it has to be a space you use exclusively for your business.
What Other Home Office Expenses Are Tax-Deductible?
If you’re self-employed – even if you’re just doing some freelance work – you may be able to deduct other expenses for setting up an office in your home, too. Furniture and equipment are deductible as business expenses on Schedule C, says Wells.
For example, the cost of buying a computer (based on the portion of time you use it for business), printer, secure modem, office desk and chair, file cabinets, and even lighting for Zoom calls you make for your business can be tax-deductible as a business expense on Schedule C.