Can You Take The Home Office Deduction?

 

This year has been different for many. For most, there has been a period of no work, or work from home status. I’ve heard statistics that approximately 45-55% of workers in major cities like New York, Los Angeles and Atlanta were working from home at the end of 2020. I’m sure most are still in that position.

If you’re in a similar boat, you may be wondering if you can take advantage of the home office deduction.

I’ll save most of you a lot of time. If you’re an employee, the answer is no. The home office deduction hasn’t been available to employees since 2017.

As an alternative, you could ask your employer for reimbursement. The best way to do this is through what’s called an accountable plan. If you have a dedicated (and that word is important. It must be an area of your home (not necessarily an entire room, but at least a specific area) that is 100% designated to home office. This means the kitchen table or coffee table in the living room won’t cut it) area of your home for home office, and that area is used regularly and required by your company, you may be eligible.

This works by keeping track of all purchases for that office. This could be tech equipment, the desk, chair, printer, paper, pens, etc.

It also includes a proportional amount of household expenses. Any expenses that are indirect or direct to the operations of the office can be included in this calculation. That would include real estate taxes, homeowner’s insurance, utilities, mortgage interest or rent, or repairs and maintenance.

Once you have a total of these expenses, this calculation works by taking the square footage of your dedicated and necessary office space, and dividing it by the total square footage of the home. This percentage is then applied to these other proportional type expenses, and that amount is allowed to be taken toward the home office (you may need to pro rate further for the percentage of the year that the office was used). As an example:

Let’s say I had $2,000 in computer expenses, $100 in printer, and $500 in desk and chair for a total of $2,600.

My home office is 10×10 and my home is 2,000 square feet. I used my office 6 months of the year. My mortgage interest, real estate taxes, homeowner’s insurance, and utilities totaled $22,000. My office is 5% of my living space, and I used it for 50% of the year. Therefore, my other indirect expenses would be $550.

In total, my office expenses are $3,150. Now what?

The accountable plan would allow you to have your employer reimburse you for these expenses tax free to you. The expenses must be documented and submitted to the employer (hence the “accountable” aspect of this). The employer would then get to deduct these expenses as business expenses.

One aspect of this to understand is that the employer is under no obligation to allow for an accountable plan, and even with the tax deduction for them, it will still cost them more money out of pocket than if they didn’t have an accountable plan. So, they may not want to do it.

If you’re self employed, you’re in luck. You can take the home office deduction without setting up an accountable plan. You’ll simply fill out form 8829 which walks you through all the steps we talked about already, and this form forwards the home office deduction to your Schedule C.

One rule to be aware of, however, is that as a self employed individual, your home office must be the primary location you conduct business. So, if you’ve been going to the office AND working from home, you probably won’t be able to take this deduction. There are some exceptions, but that’s the general rule.

Also, if you’re a S Corp owner, you may consider yourself self-employed, but in the eyes of the IRS, you’re not. So. in this case, you’d have to set up an accountable plan with yourself, essentially.

I you have questions on your eligibility or how to go about utilizing the home office deduction, give us a call. We’re happy to help.