Working From Home: Understanding Home Office Deductions

If the pandemic completely changed what a day at work looks like for you, you’re not alone. 20 percent of working adults have transitioned to remote work due to COVID-19.¹ Adapting to this new workspace isn’t easy, particularly with many companies forced to cut pay in order to preserve non-essential employees. 

And this may not be temporary. There is a lot of talk about the fact that the shift to work-from-home (WFH) may be permanent for many.  If you are one of the many newly working from home, it might make sense to assume that you’d qualify for a home office tax deduction. But in reality, this tax deduction applies only in limited circumstances.

What Is a Home Office Deduction? 

The home office deduction allows you to translate the expenses of using your home as an office into a tax cut. In other words, you can treat as a deductible business expense a fraction of what you pay in  mortgage interest or rent, insurance, utilities, repairs and depreciation. The fraction is based upon the square footage of your home office as a percentage of your overall house square footage. There are two requirements for individuals to qualify:

1. Regular and exclusive use: The use of a portion of your home for business must be regular and exclusive. The work area cannot double as a personal space. 
2. Principal place of your business: Your home must be the principal location at which you conduct business.

This is meant to apply to self-employed individuals, not employees. Many freelancers, for instance, take home office deductions. The following are considered self-employed individuals by the IRS:

• Sole proprietors and independent contractors 
• Members of partnerships that carry on a trade/business 
• Other individuals in business for themselves³

What is the Current Tax Policy?

Before the Tax Cuts and Jobs Act of 2017⁴, it was fairly common for employees to deduct expenses for a home office. However, that law eliminated the home office deduction for nearly all employees (except for certain "statutory employees").⁵ Essentially, this and many other deductions were eliminated in exchange for a much larger standard deduction and lower marginal tax rates. For most people, saving the hassle of keeping track of minor expenses was a nice benefit, and most people came out ahead financially.  

So if you’re a W-2 employee there is no home office deduction for you.   

What if I Qualify? 

If you fit into the self-employed category described above, you might be able to take advantage of the home office deduction. 

The IRS offers two options to calculate your deduction: the regular method and the simplified option. The regular method requires you to keep track of your home office expenses. The new simplified option simply multiplies home office square footage times a deduction rate of $5 per square foot.⁶ Again, you’ll have to prove to the IRS regular and exclusive use and that your home office is your principal place of business. 

If your home office expenses are sizable, it may well be worth the hassle of keeping track of your expenses.  Deductible home office expenses include a pro-rata percentage (based on square footage) of these items:

• Real estate taxes
• Qualified mortgage insurance premiums
• Deductible mortgage interest
• Casualty losses
• Depreciation
• Insurance
• Rent
• Repairs
• Security system
• Utilities and services⁷

If you qualify for the deduction, it’s highly recommended that you consult a tax professional. 

What about State Taxes? 

Many employees working from home hoping to qualify for a home office deduction due to the pandemic unfortunately won’t qualify. However, Arkansas, Minnesota and Pennsylvania still allow deductions for unreimbursed business expenses, even for employees.⁸  Pennsylvania taxpayers, for example, can deduct expenses related to a home office if:

• The job requires an employee to have a suitable work area.
• The employer does not provide a suitable work area.
• The home office is the employee's principal place of work.⁹

Again, seek qualified tax advice before attempting to make a deduction on your state income taxes for a home office.

The bottom line is that, unless you are self-employed, you will not qualify for a home office deduction even if you have been working full-time from home.  But at least you don't have to keep track of all those receipts!