Jun 4, 2020 | COVID-19, MBE CPAs

Last Updated: December 3, 2020

Working from Home? How to Deduct Your Home Office Expenses

With taxpayers working from home these past weeks, you may want to consider claiming a business deduction for expenses that qualify. However, there is uncertainty for taxpayers when it comes to the details of the requirements for a home office.

To be eligible for a home office deduction, your residence must be one of the following:

  • The primary place of business. Not just for convenience purposes, because you prefer to not drive to your work office.
  • Acting as a location to meet clients or customers for business purposes.
  • Having a separate structure not attached to your residence.
  • If the office is located within your residence, there needs to be a space within it that is used to store inventory or product samples for your business (Secs. 280A(c)(1)(A-C) and 280A(c)(2)).

Home Office Use Requirements

A home office MUST be used regularly and exclusively to conduct business. Sorry, doing your work on the coffee table does not qualify, as it’s not exclusively used for work. However, having an isolated workspace or the use of partitions is not necessary. A desk in a corner of the room could qualify, as long as it’s solely used for work for business purposes. The IRS is strict on this rule of exclusive use.

Expense Deduction Calculation

The home office deduction is calculated by categorizing business operating expenses as direct vs. indirect. Direct operating expenses are 100% deductible. For example, the costs of carpeting and painting the room. Indirect operating expenses are not fully deductible as a portion of the expense is allocated as personal use. Indirect expenses can include real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, and maintenance.

Gross Income Limitations

Home office deductions are limited to the gross income generated by your business. However, these limited deductions can be carried over to next year. Prop. Regs. Sec. 1.280A-2(i)(5) requires indirect expenses to be allowed in a specific order:

  • Tier 1: Mortgage interest and real estate taxes;
  • Tier 2: Allocated expenses that would otherwise be deductible business expenses, such as repairs, maintenance, utilities, and insurance; and
  • Tier 3: Depreciation.

The Simplified Method

Rev. Proc. 2013-13 offers a safe harbor allowing taxpayers to avoid record keeping of actual expenses. Taxpayers may use the rate of $5 per square foot (up to a maximum of 300 square feet) of the office space used for business. Under this safe harbor, depreciation is not deducted, Residence interest, real estate taxes, and casualty losses are deductible on Schedule A, however, there is no carryover provision under the simplified method.

Home Office for Partnership

Business owners in partnership can deduct home office expenses on their individual income tax return (1040), but only if the partner is expected to pay the expense without reimbursement.

The IRS rules that expenses are not deductible on an individual return unless the partnership agreement clearly states that the partner is required to personally pay for the expense without being reimbursed.

S CORPORATION OWNERS AND OTHER EMPLOYEES

Business expenses personally paid by shareholders and that are not reimbursed, are treated as unreimbursed “employee” business expenses, and are not deductible. Under the TCJA, unreimbursed employee business expense deductions are no longer permitted.

 

*Source: The Journal of Accountancy, Deducting Home Office Expenses by Dayna E. Roane, CPA/ABV, CGMA,