You frequently work from home. Does this mean you can take a tax deduction for business use of your home? If you are self-employed, maybe. If you are an employee, probably not. The Tax Cuts and Job Act eliminated 2% miscellaneous itemized deductions for tax years 2018-2025. Consequently, telecommuting employees who previously claimed an Office-in-Home deduction on Schedule A will lose this deduction in 2018. If you have self-employment income, however, you may be able to deduct home office expenses from that income.
With few exceptions, to qualify as a home office, an area of your home must be reserved exclusively for regular business use and it must be your principal place of business. The office space does not have to be in a separate room but it must be clearly identifiable as a space used exclusively for your business. If you do paperwork every night in your dining room, but also use the dining room to entertain personal guests, the dining room does not meet the exclusive use test even though it’s used regularly for business. If you have a separate room that is used only for your business but have another location where most of your business is conducted, your home office still may not qualify for the deduction.
There are some exceptions to this second requirement. If you regularly meet with patients or clients in your home office, it may qualify for the deduction even if you have another work location. These meetings must be an integral part of your business. Your home office may also qualify if all of your administrative and management activities are performed there and you have no other fixed location for these activities. For example, if you treat patients at multiple hospitals, but manage your medical practice from your home, your home office could qualify as your principal place of business, even if you do not see patients there. Your home office may also qualify if it is a separate structure on your property and is used regularly and exclusively for business.
What expenses can be deducted? The deduction is based on the square footage of the office, is pro-rated if used less than a full year and is limited to the net income from your business before the home office expense. Whether you own or rent your home you may opt to use the Simplified Method, which permits a deduction of $5 per square foot of office space up to 300 square feet. The Simplified deduction is limited to $1,500 per year.
As an alternative, you may be able to deduct actual indirect and direct expenses. “Indirect” costs are allocated based on the square footage of the office compared to the rest of the home. If 100 square feet of a 1,000 square foot apartment qualifies as a business office, 10% of the rent and utilities may be deductible. Similarly, a portion of homeownership expenses, such as mortgage interest, real estate taxes, and homeowner’s insurance may be deductible. Keep in mind, allowable depreciation expense on the office portion of your home may be subject to recapture when the home is sold.
“Direct” costs such as painting, flooring, and furnishings for the office space, whether it is rented or owned, may be fully deductible or depreciable.
If you have questions about your work from home situation and taking tax deductions, please contact Ellen Boulle-Lauria or one of our tax advisors at 301.231.6200.