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When it comes to taking a home office deduction on your annual taxes, there are two ways to do it—a simplified home office deduction or a regular deduction.
- With the simplified option, you use the square footage of your home office space (up to 300 square feet) and multiply it by $5 per square foot for a deduction of up to $1,500.
- With regular method, you use precise calculations that allow you to deduct expenses such as mortgage interest, insurance, utilities, taxes, repairs and more.
So, the question becomes, do you qualify to take a home office deduction? If so, which one should you use? Let’s dive in.
Home Office Deductions During COVID-19
It’s a strange time for millions of Americans. Many people are out of work and struggling to make ends meet. Others are now working from home.
Now more than ever, it’s essential to keep a budget, prioritize bills and try to pay down debt. You may be doing everything you can to stretch your income.
For the first time in history, the price of oil has fallen below zero dollars. The stock market is reeling after repeated dismal reports. Bitcoin plunged 50% in value in March and then recovered 25% in April. Meanwhile, researchers worry that an early end to social distancing will cause a spike in COVID-19 cases.
Despite these problems, we are all persevering. As part of that effort, businesses are asking employees to work from home during the pandemic. Accordingly, many businesses are making the most of work from home opportunities. It’s a way of practicing social distancing while staying in business.
For employees, working from home is a big transition. Nevertheless, it meets the needs of workers and businesses.
There are tax advantages to working from home. By learning about home business tax deductions, you can decrease your taxable income.
Do You Qualify for a Simplified Home Office Deduction?
With the pandemic affecting markets worldwide, many people have transitioned to working from home. If this describes you, the question becomes, do you qualify for a home office deduction according to IRS standards?
For the most part, people who work for an employer but have set up a home office to work from home during the coronavirus pandemic will not qualify for a home office deduction, because according to the IRS, it’s not their regular place of business.
However, the tax code also explains that 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” and not a space that is “appropriate and helpful.” Literally, those are phrases from the IRS tax code.
Are they confusing and ambiguous? Absolutely. They are about as clear as mud.
For now, it appears that most W-2 employees working from home during the lockdowns won’t qualify for a home office deduction.
However, with the pandemic being of unknown duration, it will be interesting to watch how many Americans decide to enter a home office deduction during tax time, regardless of how the tax code is written and meant to be applied.
Whatever you do, make sure you consult a tax professional before you act on any difficult-to-interpret deductions.
What is the Simplified Home Office Deduction?
In the past, people who work from home had to fill out Form 8829. It’s a complex 43-line form. For example, there are sections for carryovers of unused deductions, expense allocation calculations and depreciation.
With the new, simplified home office deduction enacted in 2013, you only have to fill out a short worksheet and then enter the result on your return.
The simplified home office deduction permits a deduction allowance of $5 for each square foot of office space up to 300 square feet, for a total of $1,500.
- The main benefit of the simplified home office deduction is that it lets you easily take a home office deduction without having do anything more than some simple math (your square footage x $5 per square foot).
- The main downside of the simplified home office deduction is that it limits the square footage you can deduct to 300 sq. ft. and limits your total deductable amount to only $1,500.
Put simply, the simplified office deduction rule enables you to take up to $1,500 off your taxes and reduces the paperwork required by the IRS.
It has also cut the administrative burden of small businesses across the United States by an estimated 1.6 million hours per year.
What Is the Actual Home Office Deduction?
The alternative to the simplifed home office deduction is the actual deduction, which requires complex calculations and exact tracking of your true expenses. If you take this approach, you can claim a home office greater than 300 square feet in size, which can be helpful in many cases.
However, the trade-off is that you’ll need to keep precise records of all the home office expenses that you plan to deduct, such as receipts for mortgage interest, homeowners insurance, utilities, upgrades, maintenance and repairs.
Whether you should use the simplified home office deduction or the regular one simply depends on which one will net you a larger tax deduction.
Regardless of which home office deduction approach you use, you’ll claim your home office deduction on Line 30 of Schedule C.
Farmers, however, claim their self-employment deduction on Line 32 of Schedule F.
Meanwhile, you claim your home office tax deduction on Line 21 of Schedule A if you’re an eligible employee.
Make Sure That Your Home Office Qualifies
It’s essential that you understand a few points about work from home tax deductions. For the most part, home office deductions have not changed since the introduction of the simplified home office deduction. They’re still the same, even if you use the simplified filing option.
For instance, you cannot claim a space for business if you use it for any other purpose. If your kids play games on your business computer, you cannot claim that the area is exclusively for business.
The space does qualify if you use it solely for business tasks, including:
- Administration
- Appointment scheduling
- Bookkeeping
- Client calls
- Financial reporting
Homeowners do need to know one thing about the new simplified home office deduction. If you’re a homeowner, you cannot depreciate the part of your home that you use for business.
You can, however, claim real estate taxes and allowed mortgage interest.
You can also claim casualty losses and Schedule A itemized deductions. Also, you don’t have to allocate the deductions between business and personal use like you do using the regular method.
Hiring Accounting Help for Your Small Business
Doing bookkeeping for your home business isn’t difficult. You don’t have to have a degree in accounting or math to do it. However, it does take time and work.
In some instances, it makes sense to hire a professional to do your accounting. Some people may not have enough time to do it. Others may cringe at the thought of tackling it alone.
If you’re going to hire a financial expert, it helps to understand that there are different kinds. Many people use the word “accountant”, whether they’re talking about a bookkeeper, a financial advisor, a CPA or tax preparer.
However, there’s a difference:
- A bookkeeper may perform tasks such as balancing your checkbook and paying your bills. They qualify to perform these duties after earning a certification.
- An accountant does similar work. However, they’ve earned a college degree. Typically, they’re much more knowledgeable about the field.
- A CPA has a high-level college degree. They may not do your bookkeeping, but they’ll have a staff member who can do it for you.
Getting Your Finances Together
You should also think about using technology to help you keep your books. A quick search online will reveal many software options to help you keep your finances in control.
When tax time arrives, accounting software will make it much easy to file. Personally, I like and use TurboTax and find their tax filing software to be highly intuitive. (I have no financial relationship with them, so this is an unbiased recommendation.)
What questions do you have about the simplified home office deduction? Ask them in the comments below.