“Remember to deduct my home office expenses, Diane.”
“I had to work at home since March. I can deduct all my housing expenses because I work at home, right?” No.
“My home is my office. It’s all deductible, right?” No.
Deducting your home office expenses can be tricky, so let’s break it down.
Who can Deduct Home Office Expenses?
First, if you have a W2 job and you are working at home, the answer is no. “But I used to….” I know. I know. But since 2019, unreimbursed employee expenses are no longer a deduction. If you are a W2 employee, you cannot deduct your home office.
Second, you have to have a business or be self-employed to some degree. Home office expense is only available on Schedule C (self-employment). It is not a line item on any other form. Farms and rental properties do not have “home office expense” as a line item. Neither do S-corps, Partnerships, or C-corps. If you have expenses with another business type, you will have to figure the amount of your expenses and write a check to reimburse yourself for the expenses. You can use either of the methods described below.
Third, you must have a profitable business. Home office expense cannot take you into a loss for your business. If your home helped you make money, then you can deduct a portion of the expenses from your profit. However, if you did not make any money (if you had a loss) you do not get to deduct any home office expenses. You can only deduct home office expenses from a profit. It cannot increase your loss. As the IRS sees it you would have lived there and paid for it anyway, even if you did not have a business. Personal expenses are never deductible.
Fourth, you must have separate office space. “I work at my dining room table” or the 2020 version “I work from my bed” is not a separate office space. You must have a delineated area that is your office. It can be a whole room, or it can be a ten square foot corner. The IRS is very clear that it cannot be a multi-use space. If your office is also where your kindergartener has their zoom meetings and your spouse plays Minecraft all day, it is not an office. You need a separate place solely devoted to the specific business that you are reporting. If you store inventory or supplies for your business in your garage, office, or shed, you can also include that area.
Finally, your home office must be your primary place of work. This is where 2020 got tricky. I have a nice office. I pay the rent every month. I could not use my office for 10 months because I worked at home. Normally, the IRS would not buy this story. “I pay for an office, but I don’t feel like using it, so I am going to deduct my house, too.” Um, No. Any other year. But this was 2020 and nothing was normal. My primary place of work WAS home for 10 months because there was a global pandemic, and it was not necessary to see people face to face.
So, if you abandoned your office for a few months in 2020 to work at home but were still contractually required by your lease to keep paying for the office, then yes, you could deduct your home office expenses. Not any more, though.
How Much Can I Deduct?
There are 2 methods to deducting home office expenses. You can choose which one gives you the greater deduction. Both methods require you to measure both the square footage of your office and your entire home.
If you live in a house, you can find the square footage of your home and buildings on your county assessor’s website. If you live in an apartment, the square footage is usually on your lease.
Add the square footage of the finished space of your home plus any buildings/ sheds / garage space that you are using for your business. This is your total square footage. Then add all the business square footage of your home and buildings. This is the business square footage. You will need to list these two numbers on form 8829 or Schedule C.
The first method is the long form on Form 8829. You take a percentage of all your home costs based on the percentage of square footage of your business. This is where you pull out that 9th grade algebra you thought that you would never use again. Divide your business square footage by the total square footage to get the percentage of business use.
You deduct that percentage of the utilities, trash service, property tax, mortgage interest, rent, insurance, maintenance, and even depreciation. It is a lot of number crunching and you need to keep all your records.
OR You can use the “simplified method” on Schedule C and deduct $5 per square foot for up to 300 square feet ($1500 max deduction). You do not have to document anything except the square footage of your separate office. Document your office by taking a picture and saving it with your tax files.
Sometimes the simplified method is a bigger deduction, sometimes not, but it is much easier to figure. It is often easier to first make an estimate of all your bills rather than spending the time gathering all the documents and see if it is significantly more than $5 per square foot. If it will be significantly more, then do the work adding up all your bills.
Summing up
If you have a business, and you made a profit, and you primarily work from home in a separate office space, then you can deduct your home office expenses or Schedule C or form 8829.
Please note: If you run a daycare in your home, the rules are different, so please check with a tax professional.
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