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Home Office Deductions Under COVID-19

Aug 10, 2020

As we adjust to the new normal due to COVID-19, one area that impacts us greatly is how we work. Many of us have not stepped foot in our offices in months. While working from home has its challenges (I’m looking at you interrupting toddler) it can also bring about tax benefits for certain workers.

The home office deduction has been around for years. However, this benefit became limited under the 2017 Tax Cuts and Jobs Act (“TCJA”). Below are some general guidelines for who can take this deduction, what can be deducted, and how to claim the deduction.

Who Qualifies?

Only workers with self-employment income can take advantage of this benefit. Self-employment income is derived from carrying on a trade or business as a sole proprietor, independent contractor, or owner in certain partnerships. Additionally, the home office must be (1) used regularly and exclusively for work; and (2) your principal place of business.

What Qualifies as Exclusive Use?

The home office must be a separately identifiable space that is used exclusively for a singular business. It cannot be used for personal matters or multiple businesses. It does not need to be a whole room or divided by a permanent structure.

What Qualifies as the Principal Place of Business?

A home office is the principal place of business if it is used exclusively for management and administrative activities. It is possible to have a home office and rent commercial space, but the home office must be the place where these activities are generally conducted.

If you meet customers or clients in your home, you may also be eligible for this deduction. Partners should be cognizant of the other requirements above, as it may disallow them from taking a deduction for their home offices.

Is There a Remedy for Employees and Corporate Owners?

Due to the TCJA, employees and corporate owners cannot take a home office deduction on their personal tax returns. However, companies may reimburse their employees for home office expenses and take the deduction on their corporate tax returns.

Which Expenses Can Be Deducted?

The following expenses are deductible to the extent they would have been deductible on Schedule A:

  • Real estate taxes
  • Home mortgage interest
  • Mortgage insurance premiums
  • Casualty losses attributable to a federally declared disaster

If the standard deduction is used on your Form 1040, you may not benefit from the above amounts in your home office deduction. Additionally, the following expenses may be deductible if you use your home for business:

  • Casualty losses not attributable to a federally declared disaster
  • Depreciation
  • Insurance
  • Rent paid for the use of property you do not own, but use in your trade or business
  • Repairs
  • Security system
  • Utilities and services

The home office deduction is computed based on the square footage used for the business divided by the total square footage of the home. The deductions listed above are then multiplied by this “business percentage.” If your home office was not used for the full year, be sure to include that in your calculations by prorating the final deduction or taking only the expenses incurred in the period used.

Alternatively, the simplified home office method can be used to calculate your deduction. Through this method, five dollars may be deducted for every square foot used for business up to 300 square feet. If you elect this method, actual expenses cannot be deducted for the business use of your home.

How Can You Take the Deduction?

The home office deduction is taken on Schedule C for sole proprietors/independent contractors and Schedule E for partners. You may need to file Form 8829.

Keep all records that provide the information needed to calculate your home office deduction.

Specific guidelines related to COVID-19 have not been set for this deduction, but agencies across the U.S. have reached out to Congress and recommended these requirements be relaxed for 2020.

Should you pursue a home office deduction, refer to IRS Publication 587 for more guidance and consult your tax advisor regarding the specific facts and circumstances.

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Yanelys Marx

Yanelys Marx is a Tax Partner in the Real Estate Services Group, with over 10 years of experience specializing in closely held businesses and high-net-worth individuals; assisting with both federal and state tax compliance issues.

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