Are there home office tax deductions?

As we approach year end many people may ask whether there are tax deductions related to working from home. After all, you may have needed to purchase a new keyboard and monitor, maybe some higher end networking equipment, perhaps a printer, which was only necessary because you are now working primarily from home. Plus, you’ve set aside some portion of your home for office space. Isn’t there some advantage to that?  If you listen to many internet gurus you may be led to believe that any and all expenses related to you working out of a home office can be claimed on your tax return and reduce your taxes to virtually nothing.  Well, it’s more complex than that. 

So, are there expenses that you can claim as work from home tax deductions?  The answer is a definite . . . maybe.  First off, everyone’s situation is different and the tax laws have changed considerably in the past few years, so allow me to provide the standard disclaimer that I am neither an accountant nor an attorney, so this is not tax advice. I am merely sharing with you the types of things to consider when speaking with your tax advisor and preparing for year-end bookkeeping. 

The type of employee you are has a huge impact on which deductions you may be able to claim.  In general, if you are a W-2 employee working for a company, you used to be able to claim unreimbursed business expenses prior to the Tax Cuts and Jobs Act passed in 2018. However, since then, full time employees have very few options for tax credits. Now, some states do not follow that 2018 law exactly and may still allow some limited deductions, and Tax Cuts and Jobs Act is set to expire in 2026, so there may be more options at that time. For now, there’s not a whole lot to offer. 

However, if you are self-employed or own a business, even if it’s a side gig or side hustle, there are many more options available to you. Let me repeat that . . . even if you are a W2 employee for a company, that does not disqualify you from claiming home office related tax deductions if they are related to your side gig. That’s considered separate income and therefore separate deductions apply. 

So what qualifies?  Well, in general, the IRS is going to look for expenses that are considered “ordinary and necessary” for your type of business. So, for example, buying some weights and a yoga mat so you can grab a mid-day work out in your home office would not be considered ordinary and necessary for a graphic designer, but it may be acceptable for a personal trainer. In general, expenses that are related to the set up and operation of your business that are not related to any personal use could be considered a viable deduction. Additionally, some durable equipment purchases such as a computer, printer, packing and shipping machinery or equipment, may be able to be depreciated over the course of a few years. 

Now, the big question many people ask is if the business use of their home offers any tax advantages.  And the answer to that is a definite . . . maybe.    

See, the IRS has set out specific requirements that must be satisfied in order to consider your home office space for a qualified deduction, otherwise all sorts of red flags go off, and you don’t want that to happen.  The main thing to consider is whether the part of your home that you use for office space is used "regularly and exclusively" as your principal place of business. Occasional use to handle paperwork when your business is run elsewhere may not count.  So that desk you set up in the family room or that corner of the garage that you set aside for an office may not qualify if those spaces are not used exclusively for your principal place of business, those spaces may also have personal uses. But using your garage to store inventory may be acceptable. If, however, you have a separate room or clearly identified area that is dedicated home office space and not used for anything else, you have a much better shot of having that considered. For example, if you are a personal trainer or a massage therapist and clients come into your dedicated home office for training or therapy, that could satisfy the requirements. 

OK, so you think you qualify, how does it work?  Well, there are 2 options.  The simplest method is to measure how many square feet of floor space is used for a qualified business use and take a $5 per square foot deduction. The most you can deduct this way is 300 SF, or a maximum of $1500, but if your office is bigger than that then you may want to choose option 2.

Option 2 is the actual cost method. You would calculate the percentage of your home used for qualified business purposes, then apply that percentage to actual home expenses.  For example, if you have a 4000 sf home and use 400 SF for business use, that’s 10% of your home.  You can then deduct 10% of your mortgage interest, electric bill, water bill, insurance, gas heating expenses, etc.  

But think hard before doing any of this. If you are claiming a home office deduction, either option 1 or option 2, doesn’t matter, then you may be faced with tax implications down the line when you go to sell the home.  Because you have claimed some percentage of your home as a business asset, then that same percentage of the profit you make from the sale of the home would be taxed differently than the remainder of the home which is just your personal property.  I can’t stress this enough, talk to a tax professional or accountant so you understand how any of this applies to your unique situation. It could lead to consequences and confusion if not handled properly, or it could lead to greatly reduced taxes for your business.

@deskwerkz Home office tax deductions. #taxes #workfromhome #workfromhomelife #remotework #homeofficeroutine #homeoffice @deskwerkz ♬ original sound - deskwerkz
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