Historically, the home office deduction has been available to anyone who has had to work from home because their place of employment did not provide an office space. With the Tax Reform Act, effective 2018, the deduction for employees was eliminated. However, the deduction for sole proprietors and partners continues to be available.
In response to the COVID-19 pandemic, most states have mandated a shutdown of all but essential activity, and many businesses have closed their offices, but for those who can work, working from home has become the new normal.
Thus, an opportunity arises for sole proprietors and partners who otherwise have commercial office space to avail themselves of the home office deduction since there is clearly no office to go to. The allowable home office expenses are deducted directly against income, either on a schedule C for a sole proprietor or on a schedule E for a partner.
Owners of corporations are treated as employees so they may not deduct the home office expenses on their personal return. However, the company can reimburse for home office expenses either in the form of rent or based on the actual home office cost, computed in the same manner as a sole proprietor would. The expense is a deduction to the corporation. If paid as rent, it is income to the individual, who may then use allocable home office expenses to offset the rent. If paid as a reimbursement of actual cost, it is not taxable to the individual.
To claim the home office deduction, you must not have had access to your office space during the period in which you are calculating the deduction – either locked out of the building or adhering to a government stay-at-home order. The home office space must be exclusively and regularly used for business. It cannot be used for any personal purposes, not even incidental. It must be off limits to anything except business activity. Ideally the home office is a separate room, but that is not required. Cordoning off an area within a large room is also permissible.
The home office deduction is computed based on the office square footage divided by the total house square footage, multiplied by the home expenses such as mortgage interest, real estate taxes, insurance, homeowner fees, general repairs, and utilities. The resulting amount then needs to be prorated for the number of days that the regular office was in inaccessible. Alternatively, the home office square footage percentage could be multiplied by the expenses incurred within the period of eligible home office use.
There is no specific guidance for the situation we all find ourselves in. You should discuss this matter with your tax advisor to see if your specific facts and circumstances could enable you to benefit from this deduction.