With employees across the county now unexpectedly working from home, life is suddenly much different and it raises many questions. From how to stay productive in a house full of distractions, to the best way to set up a makeshift home office, you may be learning on the fly how to navigate these uncharted waters.
One topic that has come up is whether new remote workers will have any basis for taking a home office deduction on their tax returns. The answer is… it depends.
The IRS home office rules are very specific, but how do they apply during this unprecedented situation? Read on to learn more.
Breaking Down the IRS Home Office Rules
Many people mistakenly believe that claiming a home office deduction will trigger an audit – this simply isn’t true. While the IRS has strict rules regarding the requirements you must meet to claim a home office, if you qualify, there’s no reason not to take advantage of the tax break you deserve.
Let’s take a look at the current rules surrounding home offices, and then we’ll explore how this affects those who are temporarily working at home due to COVID-19.
Basically, to qualify for a home office deduction, you’ll need to prove that the space is your principal place of business and that it’s used regularly and exclusively for business purposes.
Exclusive Use
Exclusive use means that the room is separate from the living quarters of the home. It is acceptable to divide up a room, for example, with a partition, as long as you can show that the particular section of the room was used exclusively for business purposes.
The IRS is extremely strict about the “exclusive use” requirement. For example, if you have a separate room that serves as your home office and you work there for 10 hours a day 5 days a week, then you’re in good shape. Allow your children to use the space to do their homework, however, and you’ve just lost your business deduction.
This doesn’t mean that you can’t occasionally take a personal call in your office or have a conversation with a family member. As long as the interactions are no more than what would be acceptable in a regular office, you won’t have a problem.
Regular Use
There aren’t any specific guidelines for what’s considered “regular use,” so you’ll just have to use common sense here.
If you only use the space for a few hours every once in a while, it probably won’t qualify. However, if you use it for a few hours every day, then you should be fine.
Principal Place of Business
To qualify as your “principal place of business” it must be the primary place where you conduct business or where you regularly meet with customers or clients.
If your home office is in a separate structure on your property – like a detached garage, then you don’t have to prove the principal place of business requirement as long as you meet the other two.
If you do a lot of your work out in the field, for example, if you’re a salesperson or in the trades, you can still qualify as long as you do most of your management and administrative tasks from your home office and don’t have another office where you conduct those tasks.
The Impact of COVID-19
While the information above primarily applies to self-employed workers who run their businesses out of their homes, the COVID-19 pandemic has many people who are employed by others now working form their homes.
Currently, employees who work for someone else may be able to claim a home office deduction if the use of a home office is for “the convenience of your employer.”
However, if the home office use is just “appropriate and helpful” then you can’t deduct your expenses. Clear as mud – right?
The general consensus is that these temporary home offices likely won’t qualify for a deduction.
However, since this would apply to your 2020 taxes, which you’ll file in 2021, there’s a lot that can happen between now and then.
The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) that was just passed by the U.S. House of Representatives is likely just the first of several stimulus packages and aid measures that will need to occur before this crisis is over. For this reason, you’ll want to continue to watch the news for any changes.
There’s also chatter that this shift towards home working could become more permanent as employees begin to see that they can, in fact, do their jobs from home and possibly start to demand the ability to do so.
As this happens, there could be additional pressure on the government to make adjustments that will accommodate this new change in the way things are done.
Acting on the IRS Home Office Rules
Based on what you’ve read about IRS home office rules, do you think you’ll qualify? If you’re not sure, you might want to talk to a tax professional before you file your tax return.
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