Question: I have been working from home since the onset of Covid in March of 2020. Am I entitled to an income tax deduction for the business use of my home office?
Answer: The answer depends in part on your employment status. If you are an employee and receive a salary from your employer, the current law does not permit you to take a home office deduction. A home office deduction will be allowed, however, if you are a self-employed individual and satisfy specific requirements.
The various requirements of taking deductions for a home office generally apply to both employees and self-employed individuals. The primary difference is that deductions for an employee’s home office have only been allowed for taxpayers who itemize deductions on their personal income tax returns claiming miscellaneous itemized deductions. Pursuant to the 2017 Tax Cut and Jobs Act, taxpayers may no longer deduct expenses as miscellaneous itemized deductions, thereby ending the opportunity to deduct home office expenses. If this provision of the 2017 tax act expires in 2026 as the law currently provides, employees who satisfy the home office deduction rules in the future may once again be able to claim these deductions.
For housebound self-employed individuals, an opportunity still exists to deduct home office expenses provided the stringent requirements imposed by the Internal Revenue Code are satisfied. Perhaps the most significant hurdle for deducting home office expenses is establishing that the portion of the home for which the deduction is claimed is the principal location of the taxpayer’s trade or business or, alternatively, is used as a place for meeting patients, clients and customers. Some other, limited exceptions apply which will only impact a small minority of taxpayers.
If your reason for business office exile is avoiding contact with others, the allowable exception for meeting patients, clients and customers will likely not do you any good. The more likely scenario where home office expenses will be deductible is where the home office constitutes the principal place of business for the self-employed worker. This requirement can be satisfied if the home office is used for business, administrative or management activities and the taxpayer has no other business location. Where there is a second location, the principal place of business requirement can still be satisfied if a greater portion of the business activities or a greater portion of time devoted to the business occurs in the home office.
Another major obstacle for home office deductions is the requirement that the home office be used exclusively for conducting the taxpayer’s business activities. Working at a kitchen table, for example, will not qualify if, like most people, you use your kitchen table for meals and other purposes. A segregated room which a taxpayer uses only for business purposes will qualify. A savvy taxpayer of course would do well to avoid placing a television or other leisure items in the office lest the exclusivity requirement fail to be satisfied. Nevertheless, even in the absence of a separate room used exclusively for business purposes, a segregated area used in a portion of a family den or living room can qualify so as long as the area is not used for other purposes.
Keep in mind that home office expenses cannot exceed the revenue derived from the business conducted at home. For this purpose, a portion of the expenses which are otherwise deductible in connection with a home such as mortgage interest and real estate taxes must be allocated to the business being conducted at home. By allocating mortgage interest expenses, for example, to the home business activity, a smaller amount of otherwise allowable home office expenses such as depreciation expenses can be claimed.
Finally, be aware that deducting a portion of your home office expenses could result in income recognition on the sale of your home as any gain attributable to the business portion of your home will be taxable. Home sellers who might otherwise be able to exclude from taxable income the gain on the sale of their residences may be faced with reporting income on the home sale due to the prior deduction of home office expenses.
The Tax Corner addresses various tax, estate, asset protection and other business matters. Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfbbg.com.
[DISCLAIMER – This information is solely for information purposes and does not constitute legal advice. Please contact SFBBG with all legal questions.]