Home Office Deduction

There is a growing population of employees and businesses who operate out of their home. Technology has made it possible for work to be done seamlessly throughout the world…as long as you have a good internet connection. With this new trend in the workforce, I’d like to cover how working from home impacts your taxes in this blog post.

2018 has brought a big change for employees working from home. The home office deduction is no longer available for employees. If you are an employee at a company and do not have a primary office, please understand this and be aware that this deduction was eliminated with the new tax law. However, you are not considered an employee if you are an independent contractor for a business (receiving a 1099 instead of a W2). You are a business owner in the eyes of the IRS which can be good or bad. In this case, it’s good.

You must be a business owner in order to take the home office deduction. For those of you that are business owners, here is how you qualify for a home office.

The office in your home must be used for regular and exclusive use. This rule is in place so that you can’t include the entire living room because you bring your laptop to work on the couch at night. The other rule is that your home office must be your principal place of business. This is simple if you don’t have another office outside of the home. You may still qualify for the deduction if you meet with clients regularly in the home or if you store inventory in the home.

Now that you know if your home office qualifies, let’s figure out what expenses you can deduct. Any direct expenses are 100% deductible. A new desk for the office is deductible. New floors in the office would be as well. The fun starts when you start figuring out the non-direct home expenses that are partially deductible.

Here is a list of common home office expenses that are deductible.

·        Rent/Mortgage Interest

·        Real Estate Taxes

·        Home Insurance

·        Utilities

·        Repairs & Maintenance

·        Depreciation

The calculation for these expenses is done by taking the square footage of the office and dividing it by the total square footage for your home. A home office that is 200 square feet in a 2000 square foot home qualifies for a 10% expense for the items above.

There is a deduction allowed if you don’t track these expenses. The IRS does have a safe harbor calculation for home offices. The calculation is $5 per square foot up to $1,500. However, it is usually less than the deduction of your actual expenses.

One thing that you need to be aware of is depreciation recapture. You will owe tax when you sell your home. The tax is calculated on the amount of depreciation that you claimed while you had the home office. It’s important to remember this if you sell your house after claiming home office expenses.

These rules can be complicated, and the employee change will have an impact on many taxpayers. I wanted to cover this topic for two reasons. First, don’t be surprised when you are not allowed to take the home office expense this year as an employee. Second, business owners need to make sure they understand these rules because the IRS is aware that this is a big area for overstating deductions. You are entitled to these deductions so don’t skip over them solely because you fear an audit. Don’t hesitate to consult with a tax professional if you need verification. Nothing is more frustrating to me than seeing the IRS keep more money than they deserve!

Mike Zeiter, CPA/PFS