Home offices were common in the Before Times, but since the beginning of the pandemic, it may seem as though more people work at home than are going to an actual office. Given that, understanding home office deductions is more relevant than ever before. Let's review a few of the basics.
ARE YOU ELIGIBLE FOR A HOME-OFFICE DEDUCTION?
Of course, the first question is if you are eligible for a home-office deduction. Generally speaking, the deduction is only available to business owners, independent contractors, and “gig workers.” Full-time, salaried employees (who receive a W-2) are not eligible for the deduction, even if they worked from home. In the past, employees could deduct home offices, but that rule changed so that—ironically enough—employees aren't eligible for this deduction until 2025 because the 2017 tax reform act temporarily suspended unreimbursed employee expenses.
WHAT QUALIFIES AS A HOME OFFICE?
Your home office must generally be dedicated to being exclusively used as a workspace. This can be a separate room, a designated corner, or even a separate structure on your property. For example, you have a desk area and computer where you work, but your kids also use the same space for doing homework and playing games, then that doesn't qualify as a home office.
Of note, you don't need to own your home; renters are eligible. What matters is your use of the property, not your relationship to it.
There is are exceptions to the requirement that the home office be used exclusively as a workspace. Expenses attributable to using the home for business may be deductible if the home is used regularly, but not necessarily exclusively, for storage of inventory or product samples or licensed day care services.
I'M ELIGIBLE—WHAT CAN I DEDUCT?
There are two ways to deduct a home office if you are eligible. In the simplified version, you can take $5 for each square foot of your home designated as your work area, up to 300 square feet ($1,500). In the regular version, you deduct all your related expenses, including rent, utilities, and other expenses.
Although many have "cut the cord" and eliminated home phone lines, instead opting to rely solely on cell phones, those that have not should be aware of the "first telephone line" rule. A taxpayer may not deduct the cost of basic local telephone service, including any sales or excise taxes on the basic charge, for the first line into any residence of the taxpayer. The first telephone line into any residence is considered a personal expense, even if the taxpayer can prove that it is used exclusively for business. This prohibition does not apply to optional services, such as call waiting, call forwarding, speed or three way calling, extra directory listings, or equipment rental.
A self-employed taxpayer reports income and expenses attributable to the business use of his or her home on Form 1040, Schedule C, Profit or Loss from Business. The self-employed taxpayer must also attach the following forms to his or her return: IRS Form 8829, Expenses for Business Use of Your Home, and 4562, Depreciation and Amortization, if he or she claims any depreciation allocable to the business use of his home. IRS Form 8829 can help you identify what specific items are eligible for deduction.
EXPERIENCED TAX COUNSEL CAN HELP
While working at home may be a new issue for you, it's not new for tax professionals. If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.