With the surge in the number of Americans working from home due to the pandemic, 2020 was certainly the year of the home office. So this should mean that those working from home will be able to write off their home office expenses, right? After all, many of these work from home warriors have had to shell out money for home internet, printer ink, and other equipment costs. While it is understandable to assume a home office deduction is applicable here, it actually may not be. Below we discuss who may and who may not be able to claim this deduction.
Who can claim a home office tax deduction?
Technically, the home office tax deduction can be claimed only by self-employed individuals. In other words, freelancers, small-business owners, and anyone who works for themselves. Of course, certain criteria must be met in addition to these characteristics.
What qualifies as a home office?
There are strict rules as to what qualifies as a home office. To claim this, you must use part of your home exclusively for business. In other words, a room that doubles as an office and a spare bedroom does not qualify. With this said, if you have an area of the home with a desk that is only used for work, that may qualify. In this case, you would simply measure the space that is used for work. If this includes the entire room, then you would measure the entire room.
How to take a home office deduction
A simple approach to taking a home office deduction is to deduct $5 per square foot up to 300 square feet of office space. This results in a maximum deduction of $1,500.
In the event that you think your deduction is greater than $1,500, you can track all costs for the home office. For example, if your office takes up approximately 10% of your entire home’s square footage, then you would apply the 10% factor to what it costs to keep it running. Below are several items that you would consider when using this formula:
- Business equipment: tangible equipment such as furniture, computers, electronic devices, and office machines as eligible.
- Internet: You may deduct the amount used for business purposes. If you use your internet 50% of the time for work, you can deduct that percentage of your total internet bill.
- Home expenses: These expenses include rent, mortgage interest, real estate taxes, homeowners insurance, home repairs, electricity, and gas. Once again, if your office takes up approximately 10% of your entire home’s square footage, then you would apply this factor to all of these home expenses.
- Depreciation: Items such as computers and most office equipment have a depreciation schedule of 5 years. As for office furniture, it may be depreciated over 7 years. You have the option to deduct the full amount of the depreciation or gradually subtract a portion of the total value each year.
Can W-2 employees claim a home office tax deduction?
Unfortunately, W-2 employees may not claim a home office deduction. Although in the past employees could claim a deduction for employment expenses over a certain percentage of their income, the 2018 Tax Cuts and Jobs Act eliminated these deductions from 2018 to 2025. Of course, the exception to this rule would be if you are a W-2 employee that happens to have a side, home-based business. In this case, you would be able to deduct home office expenses for this particular home-based business.
Given the fact that many employees have been forced to work remotely from home during 2020, some states may allow a one-time exception. For example, full-time remote employees who live in Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania have a unique option for their state tax returns.
As always, we recommend consulting with your tax professional when considering a home office tax deduction. Given the spike in the number of Americans working from home, this is certainly a topic on many people’s minds.
Moving forward, we see the virtual working environment trend continuing for many companies. Therefore, the importance of a home office will continue to persist. If you are considering selling your home, staging a home office is a smart approach. Are you ready to prepare your home to sell? At Live South Florida Realty, Inc. our listings consistently sell quicker and at higher prices than the averages seen in the South Florida market. Contact us today for a free consultation.