Did you work from home in 2020 due to the COVID-19 crisis? Are you wondering if you can deduct that new desk or the high-speed internet service, or other home office related expenses in your 2020 federal income tax? The answer to that question is not a simple one. So, let’s dig in and examine that answer.
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Contents
What is the home office tax deduction?
The home office deduction provides tax breaks for taxpayers who use a part of their home for business.
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1. Home Office Deductions For Employees
Background on home office deductions for employees
Normally, an employee could potentially claim itemized deductions for unreimbursed employee business expenses, including home office expenses — if the office was used for the convenience of the employer. However, unreimbursed home office expenses had to be combined with other miscellaneous expenses, such as union dues and fees for investment advice, tax advice and tax preparation. If your total miscellaneous expenses exceeded 2% of your adjusted gross income (AGI) for the year, you could write off the excess — but only if you itemized deductions.
How have the rules changed for 2018 – 2025?
However, all that changed in 2018. The Tax Cuts and Jobs Act passed in 2017 eliminated employee business expenses on Schedule A. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended write-offs for miscellaneous deductions that were formerly subject to the 2%-of-AGI rule.
The old pre-TCJA rules are scheduled to go back into effect in 2026, unless Congress extends the TCJA provisions before then.
So can employees claim home office deductions in 2020?
Under current TCJA, if you are an employee, you’re not allowed to deduct these expenses in 2020, even if you worked from home between Jan 1, 2020 to December 31, 2020 due to COVID-19 or any other reason.
2. Home Office Deductions For Self-Employed or Small Business Owner
On the other hand, self-employed people can still deduct home office expenses for federal income tax purposes under the same rules that applied before the TCJA.
3 basic requirements for claiming the home office tax deduction
- You must be self-employed.
According to The IRS, someone is self-employed if they meet one of these conditions:
- Someone who carries on a trade or business as a sole proprietor or independent contractor,
- A member of a partnership that carries on a trade or business, or
- Someone who is otherwise in business for themselves, including part-time business.
This definition would also include members (owners) of a limited liability company (LLC) because they are usually taxed as sole proprietors (single-member LLCs) or partners in a partnership (multiple-member LLCs).
2. You must use your home office regularly and exclusively.
The space you’re using for business must be used exclusively for conducting business. For example, using a spare bedroom as both your office and a playroom for your children likely makes you ineligible.
There are two exceptions:
- Day Care Businesses: If you care for children, elderly (65 or older) or handicapped individuals in your home between 7 a.m. and 6 p.m. each day, for example, you can use that part of the house for personal activities the rest of the time and still claim business deductions. To qualify for the tax break, your daycare business must meet any applicable state and local licensing requirements.
- Inventory Storage: Occasionally using that part of home to store personal items would not cancel your home office deduction.
3. Your home office must be your principal place of business.
If you typically conduct business at a location away from home but occasionally work from a home office, you can’t claim the home office deduction. Your home must be your principal place of business. That doesn’t mean you can’t occasionally work elsewhere.
How to prove regular and exclusive use of a home office?
The best way to prove regular and exclusive use is to take photos of the office space. If all that can be seen in your office is your desk, computer, bookshelves and other office equipment, the IRS will be hard-pressed to challenge your write-offs. However, you won’t necessarily be disqualified for having a couch, some chairs, a television, a bathroom and even a wet bar in your home office. After all, these things can be found in the offices of many corporate executives.
What kind of home qualifies for the home office deduction?
You can claim the deduction whether you’re a homeowner or a renter, and you can use the deduction for any type of home where you reside: a single-family home, an apartment, a condo or a houseboat. Please note that you can’t use it for a hotel or other temporary lodging.
The home office deduction rules also apply to freestanding structures. You can use a studio, garage or barn space as your home office as long as the structure meets the “exclusive and regular use” requirements.
The bottomline
Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction on their federal income tax, even if they are currently working from home. Only self-employed taxpayers qualify for home office tax deductions.
Employees may be able to write-off those deductions on their state taxes depending on their state.
To qualify, your home office must be your principal place of business.
For those who qualify, only the space you’re using for conducting business exclusively and consistently qualifies for home office deductions, with a couple of exceptions.
