Find out who qualifies for the home office tax deduction and how to claim this valuable tax break.

14 minute read

Before we continue. I want to tell you about another finance podcast that can help you ditch debt, save money, and build real wealth. The podcast clever girls know by finance expert, bolus cocoon B is just like a casual conversation about money, career and business. With your best friends. The podcast motto is no shame and no judgment. You’ll hear personal stories, lessons learned and invaluable financial tips. And it’s always fun and easy to listen to find clever girls know wherever you listen to your favorite podcasts.

Right now years ago, I got really into baking sourdough bread and I decided to pick it up again. And I’ve been having so much fun in the kitchen, creating my yeast and starter from scratch and building some beautiful and yummy loaves. And I’ve made some other homemade foods for the first time. Things that I’ve always wanted to do, like vegan ice cream and dumplings. For me, that’s been a really nice combination of picking up a new hobby and also eating well. So I encourage you to get excited about something new or restarting, something creative that you used to love, such as woodworking, knitting, baking, cooking, whatever it might be for you. I think it will help right now. And since the coronavirus quarantine began, many people have been forced to work from home. Obviously, if you didn’t have a home office before the pandemic, you might have had a few expenses to set one up.

I’ve received several questions about what benefits are allowed for home offices during the COVID-19 crisis. One of the questions came in on the quick and dirty tips, coronavirus question page, and if haven’t been there and you’d like to submit a Corona virus related question, visit quick and dirty tips.com/corona virus dash questions. The anonymous reader says, I have a question about next year’s taxes and working from home for the past 13 weeks. I’ve been forced to work from a home office. I’m a regular W2 employee, not self-employed. I have had some expenses come up that were brought about by working from home, a computer upgrade. So I can better connect to wifi, a new router and even a desk chair. So I’m comfortable while I work. Should I be keeping track of those expenses? Will they be deductible? My employer is not going to reimburse them.

Thank you for your help. And we got another question that came in from Mickey who used my contactPage@lauradadams.com to email me. She says, hi, Laura. And thank you for a wonderful podcast. I’ve been listening for years and I’ve always thought that you’d have a show for any question I could ever think of, but this new situation with COVID-19 has made me think of something that I’m sure many of us are dealing with right now to start working from home. I had to spend quite a bit of money to get my home office on par with my actual office. I know you’ve done episodes on claiming home office expenses on taxes before, but could you do an episode on whether we can claim home office expenses on our taxes next year? And if we can, things we should start thinking about now, aside from saving the receipts, thank you for your kind words and questions.

This podcast will explain who qualifies for a home office tax deduction and tips for claiming it. And if you haven’t been to the money girl section@quickanddirtytips.com, that’s where you can find all the notes for shows the complete archive of podcasts, all my books and other great resources. And you’ll find of course today’s episode, which is number 639 called five things to know about the home office tax deduction and Corona virus. So let’s get into it. I’m going to cover five things that you need to know about qualifying for the deduction in 2020. Number one COVID-19 has not changed the home office tax law. So you probably have heard me talk about the carers act that did change many personal finance rules this year, including specific tax deadlines, retirement distributions, and federal student loan payments. But the home office tax deduction is not one of the things that changed in a previous post and podcast called your guide to claiming a legit home office tax deduction.

I covered the fact that recently the tax cuts and jobs act of 2017. So I guess not quite so recent, but couple of years ago that law drastically changed who can claim a valuable home office deduction before the CJA. You could claim a home office deduction, whether you worked for yourself, or you worked for an employer either full or part time at home. Unfortunately w two employees can no longer take advantage of this tax benefit. Now you must have self employment income to qualify. The IRS was probably concerned that it was too easy to abuse this benefit and reigned it in back in 2017. So the best option for an employee is to request expense reimbursement from your current or a future employer, even though they are not obligated to pay you. If you get pushback on that request, I would make a list of all of your home office expenses.

So it’s crystal clear how much you had to spend on their behalf. They might consider it for your next cost of living raise or bonus. Again, they’re not required to reimburse you, but it seems like a reasonable thing to request. So unless Mickey or the anonymous reader has a side business that they started or will start before the end of 2020, they will not get deductions to help offset their home office setup costs. All right. So moving on to number two, which is the self-employed can claim a home office tax deduction. So as I just mentioned, they are the only folks that can use this deduction. So let’s say you use a space in a home that you rent or in a home that you own for business purposes. In 2020, there are two pretty straightforward qualifications to qualify for the home office deduction. One is that your home office space must be used regularly and exclusively for business.

And the other is that your home office must be the principle place used for business. You might use a spare bedroom or even a little nook in a hallway to run your business. You don’t need walls to separate your office, but the space should be distinct unless you qualify for an exemption such as running a daycare. In which case you don’t have to have a distinct area, it can be your entire home. It’s permissible to use a separate structure. Maybe you’ve got a garage or a studio. You can use that as your home office, if you use it regularly for business, and you must use your home as the primary place that you conduct business. Even if it’s just for administrative work, such as scheduling and bookkeeping, however, your home does not have to be the only place you work. For instance, you might work at a coffee shop or meet clients outside of your home from time to time and still be eligible for a home office tax deduction.

All right, the thing to know is that your business can be full or part time to qualify for the home office deduction. If you will, for yourself in any trade or business, either full or part time. And your primary office location is your home. You’ve got a home business, no matter what you call yourself or call your business. If you’ve got self employment income, and you do any portion of the work at home, you probably have an eligible home office. You might sell goods and services as a small business, a freelancer consultant, independent contractor, or a gig worker. As I previously mentioned, the work you do at home could just be administrative like communication, scheduling, invoicing, and recordkeeping, many types of solo, preneurs, and trades do most of their work away from home. And they still qualify for a legitimate home office deduction. These may include gig economy, workers, sales reps, and those in the construction industry.

All right, the fourth thing to know is that you can deduct direct home office expenses for your business. If you run a business from your home, your direct home office expenses qualify for a tax deduction. So what are these? The direct costs are the expenses to set up and maintain your office such as furnishings, installing a phone line or even painting the walls. These costs are 100% deductible, no matter the size of your office. And the fifth thing to know is that you can deduct indirect home office expenses for your business. In addition to those direct costs, you can have costs that are indirectly related to your office. These are the costs that affect your entire home. For instance, if you rent, it could be the cost of your rent, your renter’s insurance and your utilities. These are examples of indirect expenses because you would have those expenses, even if you didn’t have a home office.

And if you own a home potential, indirect expenses might be your mortgage interest, property taxes, home insurance utilities, yeah. And maintenance. You can’t deduct the principle portion of your mortgage payment, which that’s the amount that you borrow for your home, but you are eligible to deduct the interest. And instead of deducting the principal, what you can do is recover a part of the cost each year through depreciation deductions. And these are using formulas that were created by the IRS. And you’ll probably want help from an account to get that set up. Allowable, indirect expenses actually turned some of your personal expenses into home office, business connections, which is amazing. I would definitely encourage you to take advantage of that. If you can. These expenses are partially deductible based on the size of your office as a percentage of your home, unless you use a simplified calculation, which I’ll cover next.

So how do you calculate the home office deduction? If you are eligible, there are two ways. One is the standard method and the other is the simplified method. So let me cover the standard method. First, this one requires you to keep good records. You’ve got to calculate the percentage of your home used for business. So an example that I often use is if your home office is 12 feet by 10 feet, that’s kind of the basic size of a lesson guest bedroom. That’s 120 square feet. If your entire home is 1200 square feet, then dividing 120 by 1200 gives you a home office space. That’s 10% of your home. So in this situation, 10% of your qualifying expenses could be attributed to business use. And the remaining 90% would be personal. Let me give you an example. Let’s say your monthly power bill is $100 and you’ve got 10% of your home is used for business.

Your, your home office is 10% of your home. You could consider $10 of the money, a business expense, and $90 of the bill would be personal. So to claim standard deduction, you’re going to use form eight, eight to nine expenses for business use of your home. That will help you figure out okay, the expenses that you can deduct. And then you file it with schedule, see, which is profit or loss from business. Now, if you want a much easier way to claim a home office deduction for your business, you can use the simplified method. This is great because it doesn’t require you to keep any records like nothing. It makes it really, really easy to claim, but you’re limited for what you can claim. You can claim fine, $5 per square foot of your office area up to a maximum of 300 square feet. So that capture deduction at $1,500 per year, the simplified method requires you simply to measure your office space and include it on schedule C.

It’s going to work best if you’ve got a small home office. Well, the first approach that I covered, the standard approach, that’s better when your office is bigger than 300 square feet, you’re going to get more of a deduction and you get to choose the method that gives you the largest tax break for any year, no matter which method you use choose to calculate a home office tax deduction. You can not did doc more than your business’s net profit. However, you can carry it over into future tax years. And again, this is something you’re gonna, you’re gonna want to get help from an accountant to make sure you maximize also note that business expenses that are unrelated to your home office, like marketing equipment, software, office supplies, and business insurance. Those are fully deductible, no matter where you run your business again, if you’ve got any questions about qualifying business expenses, home office expenses or taxes in general, consult with a qualified tax accountant, they will help you maximize every possible deduction and help you save money.

In a lot of cases, they’re going to pay for themselves. The cost of working with a trusted financial advisor or a tax pro is worth every penny. So I hope that helps you understand that if you are a w two employee, you are not eligible for any home office deductions, at least not at this point, unless something in the law changes, which you know, I don’t have any reason to believe that it will. Nonetheless, you might want to keep up with your receipts so that you can submit those to your employer as proof of the costs that you had to spend on their behalf. Thanks again to Mickey and our anonymous reader for sending in those questions. That’s all for now. I’ll talk to you next week until then here’s to living a richer life. Money girl is produced by the audio wizard, Steve rookie Berg with editorial support from Karen Hertzberg. If you’ve been enjoying the podcast, take a moment to rate and review it on Apple podcasts or wherever you get. Your podcasts, new episodes are released every Wednesday. And when you’re subscribed to the show, you get them automatically for free. So be sure to hit the subscribe button in the podcast app or wherever you listen, you might also like the backlist episodes and show notes that are always available@quickanddirtytips.com.

Since the coronavirus quarantine began, many people have been forced to work from home. If you didn’t have a home office before the pandemic, you might have had a few expenses to set one up. I’ve received several questions about what benefits are allowed for home offices during the COVID-19 crisis.

One question came in on the QDT coronavirus question page. Money Girl reader Ian said:

“I have a question about next year’s taxes and working from home. For the past 13 weeks, I have been forced to work from a home office. (I am a regular W-2 employee, not self-employed.) I have had some expenses come up that were brought about by working from home: a computer upgrade so I can better connect to Wi-Fi, a new router, and even a desk chair so I am comfortable while I work. Should I be keeping track of those expenses? Will they be deductible? My employer is not going to reimburse them. Thank you for your help!”

Another question came from Miki, who used my contact page at Lauradadams.com to reach me. She said:

“Hi, Laura, and thank you for a wonderful podcast! I’ve been listening for years and have always thought that you’d have a show for any question I could ever think of. But this new situation with COVID-19 has made me think of something that I’m sure many of us are dealing with right now.

“To start working from home, I had to spend quite a bit of money to get my home office on par with my actual office. I know you’ve done episodes on claiming home office expenses on taxes before, but could you do an episode on whether we can claim home office expenses on our taxes next year? And if we can, things we should start thinking about now (aside from saving the receipts)?”

Thanks for your kind words and thoughtful questions! I’ll explain who qualifies for a home office tax deduction and serve up some tips for claiming it.

5 things to know about the home office tax deduction during coronavirus

Here’s the detail on five things you should know about qualifying for the home office tax deduction in 2020.

1. COVID-19 has not changed the home office tax law

The CARES Act changed many personal finance rules including specific tax deadlines, retirement distributions, and federal student loan payments – but the home office tax deduction is not one of them. In a previous post and podcast, Your Guide to Claiming a Legit Home Office Tax Deduction, I covered the fact that the Tax Cuts and Jobs Act (TCJA) of 2017 drastically changed who can claim this valuable deduction.

Before the TCJA, you could claim a home office deduction whether you worked for yourself or for an employer either full- or part-time. Unfortunately, W-2 employees can no longer take advantage of this tax benefit. Now, you must have self-employment income to qualify. My guess is that the IRS was concerned that it was too easy to abuse this benefit and reined it in.

The best option for an employee is to request expense reimbursement from your current or future employer even though they’re not obligated to pay you. If you get pushback, make a list of all your home office expenses so it’s clear how much you spent on their behalf. They might consider it for your next cost of living raise or bonus.

Unless Miki or Ian have a side business that they started or will start, before the end of 2020, they won’t get deductions to help offset their home office setup costs.

2. The self-employed can claim a home office tax deduction

Let’s say you use a space in a home that you rent or own for business purposes in 2020. There are two pretty straightforward qualifications to qualify for the home office deduction:

  • Your home office space must be used regularly and exclusively for business
  • Your home office must be the principal place used for business

You could use a spare bedroom or a hallway nook to run your business. You don’t need walls to separate your office, but the space should be distinct – unless you qualify for an exemption, such as running a daycare. It’s permissible to use a separate structure, such as a garage or studio, as your home office if you use it regularly for business.

You must use your home as the primary place you conduct business – even if it’s just for administrative work, such as scheduling and bookkeeping. However, your home doesn’t have to be the only place you work in. For instance, you might work at a coffee shop or meet clients there from time to time and still be eligible for a home office tax deduction.

3. Your business can be full- or part-time to qualify for a home office tax deduction

If you work for yourself in any trade or business, either full- or part-time, and your primary office location is your home, you have a home business. No matter what you call yourself or your business, if you have self-employment income and do any portion of the work at home, you probably have an eligible home office. You might sell goods and services as a small business, freelancer, consultant, independent contractor, or gig worker.

As I previously mentioned, the work you do at home could just be administrative tasks for your business, such as communication, scheduling, invoicing, and recordkeeping. Many types of solopreneurs and trades do most of their work away from home and still qualify for a legitimate home office deduction. These may include gig economy workers, sales reps, and those in the construction industry.

4. You can deduct direct home office expenses for your business

If you run a business from home, your direct home office expenses qualify for a tax deduction. These are costs to set up and maintain your office, such as furnishings, installing a phone line, or painting the walls. These costs are 100% deductible, no matter the size of the office.

5. You can deduct indirect home office expenses for your business

Additionally, you’ll have costs that are related to your office that affect your entire home. For instance, if you’re a renter, the cost of rent, renters insurance, and utilities are examples of indirect expenses. You’d have these expenses even if you didn’t have a home office.

If you own your home, potential indirect expenses typically include mortgage interest, property taxes, home insurance, utilities, and maintenance. You can’t deduct the principal portion of your mortgage payment, which is the amount borrowed for the home. Instead, you’re allowed to recover a part of the cost each year through depreciation deductions, using formulas created by the IRS.

Allowable indirect expenses actually turn some of your personal costs into home office business deductions, which is fantastic! They’re partially deductible based on the size of your office as a percentage of your home – unless you use a simplified calculation, which I’ll cover next.

How to calculate your home office tax deduction

If you qualify for the home office deduction, there are two ways you can calculate it: the standard method or the simplified method.

The standard method requires you to keep good records and calculate the percentage of your home used for business. For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then diving 120 by 1,200 gives you a home office space that’s 10% of your home.

In this example, 10% of your qualifying expenses could be attributed to business use, and the remaining 90% would be for personal use. If your monthly power bill is $100 and 10% of your home qualifies for business use, you can consider $10 of the bill a business expense.

To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Home, to figure out the expenses you can deduct and then file it with Schedule C, Profit or Loss From Business.

The simplified method doesn’t require you to keep any records, which makes it incredibly easy to claim. You can claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.

The simplified method requires you to measure your office space and include it on Schedule C. It works best for small home offices, while the standard approach is better when your office is bigger than 300 square feet. You can choose the method that gives you the largest tax break for any year.

No matter which method you choose to calculate a home office tax deduction, you can’t deduct more than your business’s net profit. However, you can carry them forward into future tax years.

Also note that business expenses that are unrelated to your home office – such as marketing, equipment, software, office supplies, and business insurance – are fully deductible no matter where you run your business.

If you have any questions about qualifying business expenses, home office expenses, or taxes, consult with a qualified tax accountant to maximize every possible deduction and save money. The cost of working with a trusted financial advisor or tax pro is worth every penny.

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About the Author

Laura Adams, Quick and Dirty Tips

Laura Adams, Quick and Dirty Tips

Laura Adams is an award-winning author of multiple books, including Money Girl’s Smart Moves to Grow Rich. Her newest title, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, is an Amazon No. 1 New Release. Laura’s been the writer and host of the popular Money Girl Podcast, a top weekly audio show in Apple Podcasts, since 2008. She’s a frequent source for the national media and has been featured on most major news outlets including NBC, CBS, ABC FOX, Bloomberg, NPR, The New York Times, The Wall Street Journal, The Washington Post, Money, Time, Kiplinger’s, USA Today, U.S News, Huffington Post, Marketplace, Forbes, Fortune, Consumer Reports, MSN, and many other radio, print, and online publications. Millions of readers and listeners benefit from her practical financial advice. Her mission is to empower consumers to live richer lives through her podcasting, speaking, spokesperson, teaching, and advocacy work. Laura received an MBA from the University of Florida. Visit LauraDAdams.com to learn more and connect with her.

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