Over a month ago, I wrote an article about the home office deduction that attracted very little notice. I figured folks were either overwhelmed with COVID-19 coverage, or the article didn’t apply to them. More recently, I realized that I was wrong: taxpayers assumed the article didn’t apply to them.
Since then, I’ve received tweets, comments, and emails from workers asking about the deduction because they’re sure that it applies to them. They are, after all, working from home through no reason of their own. They cannot physically return to the office or other workplace. And their employer may require them to work from home as a condition of their employment. In other words, for many, it’s work from home or lose a paycheck.
Those all feel like excellent reasons to be able to deduct the cost of the internet and other home office expenses. But they are not enough. As a result of the Tax Cuts and Jobs Act (TCJA), for the tax years 2018 through 2025, you cannot deduct home office expenses if you are an employee.
To be clear, there is no hardship exemption or coronavirus waiver. It’s a very bright-line rule: employees who work from home can no longer claim the home office deduction. The reason you are working from home does not matter.
The TCJA did not change the home office expense rules for self-employed persons and independent contractors. To be clear, you are not self-employed just because you are working from home. If you are receiving a paycheck from an employer, and those wages will be reported on a W-2, you are an employee. Working from home is not enough, on its own, to cause a switch to a 1099. And while you certainly may receive a form W-2 and a form 1099 in the same tax year, you should not receive a form W-2 and a form 1099 for the same work from the same employer.
If you are self-employed – even as a gig worker – you can continue to deduct qualifying home office expenses. Typically, you would report the home office deduction on federal form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C, Profit or Loss From Your Business, on your 1040.
To qualify for the home office deduction, the part of your home attributable to business must be “exclusively and regularly for your trade or business” and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business. In other words, to be deductible, your home office must be your actual office and not just at your home for convenience. And more importantly, if you use part of your home as a workspace, it must be space that is used solely for business.
A dedicated space doesn’t mean that you have to have a separate room. You can have a dedicated space – a table in the corner that’s just used for your office work – in a room used for other things. You just need to calculate the space and figure the deduction appropriately.
If you have more than one business location, including your home, that doesn’t disqualify you: you just need to make sure that you meet the criteria for the home office deduction. Again, to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business.
In a gig economy, you might also have more than one business. The same home office can be the principal place of business for two or more separate business activities. But you can’t combine the tests: whether your home office is the principal place of business for more than one business must be determined separately for each of your trades or businesses.
Calculating the deduction used to take a bit more math. For years, the rule was that you must figure the amount of space attributable to your business and compare it with the total and use that amount to figure the deduction. So, if your home office space is 200 square feet and your home is 2000 square feet, you would claim 10% (200/2000) of your home-related expenses (insurance, taxes, mortgage interest, etc.) as a home office deduction. That’s still an option.
However, since the 2013 tax year, there’s also a simplified option for the home office deduction. With the simplified option, you may claim a standard deduction of $5 per square foot of home used for business up to a maximum of 300 square feet. Using the same numbers as above, if your home office is 200 square feet, the simplified option for the home office deduction would allow you to claim $1,000 (200 square feet x $5) as a home office deduction.
But remember: those rules don’t apply if you’re an employee in 2020: you cannot deduct home office expenses if you are an employee. It’s one of several changes on Schedule A. Those changes were intended to be absorbed or mitigated by the doubling of the standard deduction.
A lot of taxpayers didn’t mind so much when the law changed in 2017, but now they do. If this bugs you, don’t shoot the messenger. Instead, contact your Congressional official:
- Locate your U.S. Senators’ contact information.
- Locate your U.S. Representative’s contact information.
The loss of the home office deduction for employees has some taxpayers wondering whether it makes sense to quit their day jobs and become self-employed. That’s an individual decision, but if you’re focusing simply on the home office piece, the numbers probably don’t support that kind of shift. For more to consider when it comes to business-related decisions in light of tax reform, check out this article.
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