The onset of the Covid19 pandemic led millions of Americans to work from home. For many, it has been a significant cost-saver, thanks to lower transport and meal expenses. But, on the other hand, working from home has also led to higher costs for utility bills, home office equipment, furniture, stationery, and office supplies.
The work from home office tax deductions may seem very tempting but there are a couple of things you must keep in mind before applying for the deduction.
Not everyone can claim it
Working from home is one of the greatest perks of being a freelancer since it provides you with significant tax deductions. These deductions are generally not available for the W2 employees working remotely.
The TCJA, prohibited salaried employees to claim the home office deduction. However, there are certain exceptions to the rule. The IRS offers an exception to five types of professions to deduct a portion of their out-of-pocket work expenses:
Performing artists: This includes actors, dancers, musicians, and other performing artists who may deduct certain expenses pertaining to their professions, such as professional photos, website costs, travel, and more.
National Guard and Reservists: If you are a member of the National Guard or the Reservists, you can deduct some out-of-pocket work expenses.
State and local government officials: State and local government officials can deduct work-related expenses, including home office and travel costs.
People with physical or mental disabilities: If you are physically or mentally disabled, you can deduct work from home expenses, including attendant care.
Kindergarten through grade 12 educators: As an educator, counselor, or principal, you can deduct up to $250 of out-of-pocket work expenses.
These professionals can file Form 2106 and itemize their home office expenses. Some of the top office deductions include the following:
If you work from home, you can deduct a portion of your monthly rent as a legitimate business expense.
Home office furniture
Any furniture that you buy for your workstation is deductible since it is used exclusively for business activities.
Home office equipment
If you require a computer or a printer for your business, you can claim a deduction for the same. However, in order to claim the full deduction, you need to make sure that the equipment is not being utilized for personal use.
The cost of insurance can be pretty hefty, however, one of the perks of the home office deductions is that you can write off the cost of insurance that is associated with the business part of your home.
Here, you can deduct the cost of vacuum cleaners, mop, and other cleaning supplies that are necessary for you to maintain your home office.
Utility expenses may not seem like much but in the long run, they can add up to a huge amount. So, if you operate your business from your home office, you can claim a deduction for basic utilities like electricity, gas, water, and trash removal facilities for the portion limited to your home office.
Home repairs and maintenance
If you decide to get a spare room within your house renovated to serve as a home office, you can claim a deduction for the cost associated with the repair and maintenance.
Telephone & Wifi bill
You probably require a reliable internet connection to run your business. So, you can claim a portion of your wifi expenses on your taxes! If you wish to claim a full deduction, you have to get a wifi connection exclusively for your home office. Similarly, if you have a landline connection, a portion of it can be written off.
Not all home office setups qualify
It’s important to remember that in order to claim the home office deduction, you must meet some conditions set forth by the IRS:
Exclusive and regular use: You must regularly use part of your home exclusively for conducting business. This means that your home office cannot be utilized for any personal activities. It cannot serve as a spare bedroom for your guests.
Principal place of business: You must confirm that you use your home office as your principal place of business. So, your home office must be the principal location of your business or a place where you regularly meet with customers or clients.
Choose the right method
Calculating the home office deduction need not be complicated, the IRS generally offers two different methods for claiming the home office deduction- the simplified method, and the regular method. You can pick either, but not both.
The regular method requires a lot of paperwork and allows you to calculate your actual home office expenses. So, when it comes to computing tax deductions using the regular method, tax cuts are calculated based on the percentage of the house devoted as an office space.
To figure out the allowable business percentage of your home area, you can use refer to either of the following methods:
- Divide the area used for business by the total area of your home.
- If the rooms in your home are of the same size, you can divide the number of rooms used for business by the total number of rooms in your home.
However, we’ll recommend you to go with the area method that works best, since most homes do not house rooms of an equal size.
The simplified method offers taxpayers to multiply an IRS prescribed rate by the allowable square footage of the office instead of determining actual expenses. However, there are some limitations to the simplified option-
- Standard deduction of $5 per square foot of home used for business (maximum 300 square feet).
- You cannot deduct depreciation.
- You cannot use the deduction to take a business loss.
- Amount over gross income limitation cannot be carried over.
Don’t get too greedy
The home office deduction is highly beneficial but it is infamous for being an audit red flag. To avoid an audit, try not to get too greedy about the deductions. Report only those expenses that are exclusively required for your business. Don’t overstate your expenses/deductions.
Seek help from an expert
The home office deduction can be confusing, especially when it comes to choosing the ideal method. Generally, it is suggested that if you reside in an expensive area where mortgage and rent payments are higher, you may want to go with the regular method since it may result in a higher deduction if your housing and utility payments are costly.
However, if you are confused and unsure about what you can and cannot deduct, seek help from a CPA or use a tax filing app like FlyFin. The app is powered by A.I. and backed by CPAs whom you can consult to determine which method works best for you.
If your are self-employed, do consider claiming the home office as a deduction on your annual tax return.