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If you are self-employed and work at home — even just part-time — you may claim a tax deduction for expenses related to your home office. Alas, if you’re an employee who has been working from home due to the COVID-19 pandemic, that amazing home office deduction you’ve heard so much about does not apply.
I started working from home due to the pandemic. Can I deduct my home office expenses?
Unfortunately, the answer to that question is no. There is no tax deduction available for traditional employees (those who work for an employer as a full-time or part-time employee) to deduct the expenses related to their home office. The home office deduction you’re likely familiar with is only available to self-employed people.
Many companies have provided home office stipends or financial support of some capacity for their employees throughout the pandemic while mandating they work from home. If your company has not offered to cover any of your new expenses, our recommendation is to reach out to your HR department or direct boss to discuss the possibility of receiving assistance. It never hurts to ask!
While working from home is convenient and comes with various perks, the increased utility cost and the need to purchase equipment to work efficiently can be a strain on your bank account. We encourage you to start a conversation with your employer about how they could help offset some of those extra costs — especially if you won’t be returning to the office any time soon.
Can I deduct my home office supplies as unreimbursed employee expenses?
Tax reform in 2018 changed the home office deduction, including what traditional employees could deduct related to their work expenses.
Before the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, you could deduct unreimbursed job expenses that exceeded 2 percent of your adjusted gross income (AGI) on your federal income tax return using Schedule A. Sadly, that’s not the case anymore.
If you work at home as an employee — even for your employer’s convenience — you can no longer deduct your out-of-pocket expenses. The new tax law did away with deductions for unreimbursed employee expenses.
If you’re self-employed, you can still claim the home office deduction for qualifying costs, whether you use the actual expenses or the simplified method. The deduction decreases your business income, and therefore, your gross income.
Qualifications to claim the home office deduction
You may qualify to claim the home office deduction if you solely use a portion of your home for your business and nothing else, in most cases.
The definition of a home office
To be considered a home office, the area must be used regularly and exclusively for your self-employed business. The office space must be your primary place of business or a separate structure used in connection with your business.
There is no requirement that your home office needs to be partitioned off from other areas with a wall or additional barrier. For example, if you have a desk in the corner of your living room where you conduct your business, you can still qualify for the deduction provided you don’t also use that specific area of your home for personal use.
Exceptions to the home office deduction
There are sometimes exceptions to the home office rules. For instance, in-home daycare businesses don’t have to meet the exclusive use test. To qualify for that exception, you must meet two different requirements:
- You provide daycare for children, people 65 years or older, or people who are physically or mentally unable to care for themselves
- You must have a license, certification, registration, or approval as a daycare center under state law (or you’ve been granted an exemption from needing one)
The IRS provides another exception for those who use their homes to store business inventory or product samples. To qualify for this exception and claim the home office deduction, you must meet all of the following requirements:
- You sell your products at wholesale or retail as your business
- You keep the inventory or samples in your home for business use
- Your home is your only business location
- You regularly use the storage space for business purposes
- You use an area that is separately identifiable as suitable for storage
Home office business expenses
Home office business expenses are divided into direct and indirect expenses.
Direct expenses are costs that only apply to your home office, such as furniture and equipment, supplies, and so on. You can claim 100 percent of direct expenses on your tax return.
Indirect expenses are costs that don’t exclusively apply to your home business, such as utilities, rent, insurance, security system fees, and similar costs. To find the deductible percentage of these costs, you divide the total square footage of your home by the number of square feet in your home office.
Indirect expenses are costs that don’t exclusively apply to your home business, such as utilities, rent, mortgage insurance, real estate taxes, security system fees, and similar costs. Use Schedule A to claim these deductions. To find the deductible percentage of these costs, you divide the total square footage of your home by the number of square feet in your home office.
Simplified method
If crunching the percentage numbers for your business expenses sounds like a lot of work, you can use the simplified method instead. The IRS offers taxpayers the simplified method to make your home office deduction calculation easier.
With the simplified method, you deduct a flat rate per square foot — for tax year 2021, that would be $5 per square foot for up to 300 square feet. You can choose between the simplified method and tracking actual expenses every year.
The simplified method is still only available to self-employed people (like independent contractors or freelancers) who run their businesses from home. As we discussed earlier, traditional employees who work from home can no longer claim these expenses as deductions on their tax returns.
The home office deduction and audits
Taking the home office deduction does not significantly increase your chances of being audited. But as always, a good rule of thumb is to keep excellent records of your income and expenses — down to every last penny spent or earned.
While claiming this deduction doesn’t make an audit more likely, it’s always essential to keep good records. File away all of your receipts for safekeeping, so you have them as a backup for proof in the event of an audit.