The home office deduction is an often overlooked deduction. This deduction is available to qualifying self-employed taxpayers, independent contractors (1099 income), or those actively participating in a S Corporation if they do not have a designated workspace (i.e.: a physical office). Before tax reform, W-2 employees could also claim a home office deduction. However, starting in 2018, this deduction is not available to employees. Even in the current environment when a majority of the workforce is working from home the deduction is not available for workers who receive a paycheck.
If you qualify for this deduction, there are two methods: actual expense method or a simplified method. For actual expenses you would start with calculating the percentage of your house that you use for your office) square footage of office/ square footage of home). The following expenses are deductible based on the percentage of your home used for business:
- Insurance
- Electricity
- Water
- Internet
- Gas
- Security System
- General repairs made to your home
If you have expenses that are only related to the business part of your home (i.e., painting and repairs only in the area used for business) those are deductible in full.
The simplified method is just as the name implies. In most cases you will figure your deduction by multiplying $5 (the prescribed rate) by the area of your home used for the qualified business use. You are limited to a 300 square foot area. When using the simplified method, the max for the deduction is $1,500.
You can choose the simplified method one year and then the next year choose the actual expense method. However, once you have elected a method for a taxable year, you cannot later change to the other method for that same year.
The home office deduction may be beneficial to your unique tax situation. Should you have questions or concerns, please do not hesitate to contact one of our trusted tax advisors.
