Have you heard about a home office deduction? Over the last few years, with more and more people working from home, we routinely receive questions about the home office deduction and how individuals can take advantage of it to reduce tax liability. Unfortunately, the Tax Cuts and Jobs Act (TCJA) changed eligibility for common deductions, removing home office and other deductions from many taxpayers.
Who Can Deduct Home Office Expenses?
Under TCJA, employees are no longer able to deduct home office expenses on their annual tax returns. Only those individuals who are self-employed (LLC/1099-NEC) or are considered statutory employees can utilize this option to offset their income. For a home office deduction to be allowable, the taxpayer must have a dedicated space in the home used exclusively for business. If you work at the kitchen table, that would not be considered exclusive use. Additionally, the home office must generally be the place where business is conducted. This requirement is also met if administrative or management functions of the business are conducted at the home and there isn’t an alternative location to perform these duties. For example, a Real Estate Agent performs his/her work generally away from the home showing properties. However, the administrative functions, like writing contracts or marketing, are frequently completed in the home office. In this example, even though a good amount of the work is completed outside the home, the home office deduction is allowed. Another example would be a contractor who works in other people’s homes but manages his/her business from a home office.
What Expenses Are Deductible?
Deductible expenses include insurance, utilities, repairs, maintenance, and improvements directly related to the dedicated office space. Additionally, if you own your home, a portion of your mortgage interest is deductible. Similarly, if you rent, you can deduct a portion of your monthly rent payment.
How is the Deductible Amount Determined?
Every tax preparer is different, but at Levesque & Associates we request a summary of your total household expenses for the year along with the total square footage of your home and the square footage of the dedicated space. The deductible portion of your home expenses is calculated as a percentage of the total based on the percentage of the home being used for your business activities. For example, if you have a 2,000 square foot house and your home office is 200 square feet, 10% of the total expenses would be considered deductible.
What About S-Corp Owners?
If you have an S-Corp and use a portion of your home exclusively for your business, the deduction is not as straightforward as what is described above. Two options exist for taking advantage of the home office:
1. The S-Corp can pay you rent for the home office space which is a deductible expense for the business (but rental income must be claimed on your personal return); or
2. The S-Corp can pay you for the costs of the home office out of an accountable plan.
Interest in more information on this or other tax efficient strategies for businesses? Get in touch with us!