Working from home, either as a remote employee or for your own business, has become common. Companies and those who are self-employed can drastically cut overhead when they don’t have to pay for office space. And most employees love skipping the daily grind of commuting and having flexibility for when and where they work.
Another huge benefit of working from home is claiming money-saving tax deductions. But beginning with the 2018 tax year, fewer taxpayers will be eligible for home office deductions under the new Tax Cuts and Jobs Act.
In this post, you’ll learn what tax reform did and didn’t change about claiming a deduction when you work from home.
Beginning with the 2018 tax year, fewer taxpayers will be eligible for a home office deduction under the new Tax Cuts and Jobs Act.
Home Office Tax Deduction Changes for Employees
Getting a tax deduction for a home office is treated differently depending on whether you work for yourself or for someone else. Let’s start with how tax reform affects deductions for W2 employees.
Beginning in 2018, employees are no longer eligible to deduct unreimbursed job expenses, including the cost of a home office. So, if you’ve grown accustomed to writing off a variety of expenses related to your job, it’s time to kiss them goodbye. (You can still claim valid expenses on Schedule A for your 2017 tax return, so don’t miss out on deductions that were legal before tax reform began.)
Prior to the Tax Cuts and Jobs Act, workers could deduct job expenses that weren’t reimbursed by their employers. You couldn’t deduct all of them, but you could claim a total that added up to more than 2% of your adjusted gross income.
Deductible expenses included any “ordinary and necessary” cost to do your job or improve your job skills, such as:
- Subscribing to a trade magazine
- Attending an industry conference
- Buying protective clothing
- Paying union dues
- Buying your own tools
- Driving your vehicle
- Paying for travel, lodging, and meals
- Working with an employment agency to find a new job
- Using any part of your home for your work
These are just a few examples from a long list of eligible expenses that, under the old tax rules, employees could deduct when they shelled out for them, but weren’t reimbursed. Any expense that helped you do your job, including the cost of maintaining a home office, was fair game for a deduction.
Unless employers choose to reimburse workers for these common costs, the elimination of this deduction is a big blow to employees with job-related expenses. For example, if you earned $100,000 and had $5,000 in unreimbursed job expenses, you could deduct $3,000 (the amount over 2% of income). If you paid an average tax rate of 20%, that deduction would have saved you $600 in taxes.
While it’s true that the standard deduction under tax reform has nearly doubled to $12,000 for singles and $24,000 for joint filers, if you’re an employee who pays a significant amount of job-related expenses out of pocket, you may not come out ahead. Consider asking your company for ways to offset the costs you pay to be successful in your job—especially if you maintain a home office for their convenience.
How Businesses Can Use the Home Office Tax Deduction
The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income.
Now, let’s switch gears and cover claiming a home office deduction when you work for yourself.
The good news is that if you’re self-employed or run a business from home, tax reform didn’t change your ability to deduct home office expenses against your business income. You can still claim the costs of a home office as business expenses, using Schedule C.
So, the only taxpayers affected are employees who work from home, not business owners and those who are self-employed. However, the same strict limitations on who can claim a home office deduction still exist.
See also: 5 Steps to Create Your Own Self Employed Benefits Package
Who Can Claim the Home Office Deduction
I received a question on this topic from Sandy N., who says, “I have a part-time business selling on eBay. I work at home and store all my inventory there, but in different rooms. Do I qualify for the home office deduction? If so, how would I calculate it and do I need a tax ID number?”
Thanks for your question, Sandy. You don’t need a tax ID number to have a business or to claim valid tax deductions. If you use part of your home exclusively and regularly to conduct your business, even on a part-time basis, you’re qualified to deduct home office expenses.
You can include both the space you use for work plus your inventory storage spaces in your deduction calculation. You can even take a home office deduction if you work in other locations occasionally, such as meeting people in a coffee shop or visiting businesses. You can claim a home office no matter if you own your home or rent.
See also: 6 Tips to Find Affordable Health Insurance When You Become Self Employed
How to Calculate the Home Office Deduction
The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have.
The deduction amount you can claim depends on the type of calculation method you use and the types of expenses you have. There are two ways you can claim a home office deduction. If you’re not sure which home office method is best, try both to find which one saves you the most in taxes.
- Standard method: This method requires you to determine the percentage of your home that’s used for business. Measure the total square footage of your home and the total square footage of your work areas. Then divide the business area by the size of your entire home. For example, if your home or apartment is 2,000 square feet and 400 of it is your work and storage areas, you could deduct 20% of your expenses.
This method requires you to keep detailed records of all your expenses. You use Form 8829 to figure out the expenses you can deduct, complete Schedule C, and submit both forms when you file taxes.
- Simplified method: This method gives you a flat rate to deduct that’s much easier to calculate than the standard method. You’re allowed to deduct $5 per square foot of your home office areas.
Problem is, the simplified method is capped at 300 square feet, which limits the deduction to $1,500. So, if the business areas in your home are larger than 300 square feet, or your deduction would add up to more than $1,500, you’ll come out ahead using the standard method. Detailed records aren’t required; just measure the spaces in your home that are used for business and include the calculation on Schedule C.
Which Home Office Expenses Are Deductible
You’re probably wondering which home office expenses you can deduct if you choose to use the standard method. There are a variety of personal expenses that legitimately become deductible when you operate a business from home.
There are a variety of personal expenses that legitimately become deductible when you operate a business from home.
As I mentioned, maintaining records for the standard method is more of a hassle than using the $5 per square foot, simplified method, but may get you a larger deduction.
When claiming the standard home office deduction, you need to keep track of these two types of expenses:
- Direct expenses: These are for your office only. Let’s say you start a side business like web design or selling items on eBay, like Sandy. If you create an office in your spare bedroom and paint the room, install carpet, and install window treatments, these direct expenses are 100% deductible, no matter the size of the office.
- Indirect expenses: These are for your entire home. You’d have these expenses even if you didn’t have a home office. They’re partially deductible based on the size of your office as a percentage of your home. They might include mortgage interest payments, property taxes, rent, insurance, maintenance, cleaning, utilities, garbage disposal, and a security system. So, if your rent, insurance, and utilities total $2,000, and 20% of your home qualifies for business use, $400 of your monthly bills would be deductible.
Tips for Homeowners With Home Offices
If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible. You can't deduct the principal portion, which is the amount you borrowed for the home. Instead, you’re allowed to recover a portion of the cost each year through depreciation deductions, using formulas created by the IRS. You can claim mortgage interest, real estate taxes, home insurance, and depreciation, as indirect home office expenses.
If you’re a homeowner, taking the home office deduction gets a little more complicated because only a portion of your mortgage payment is deductible.
Even if you don’t use your home for business, you can claim the mortgage interest deduction, which allows you to claim qualified mortgage interest and real estate taxes, if you itemize deductions on Schedule A. However, claiming these as part of the home office deduction can save you more in taxes because you shift them from an itemized deduction to a more valuable business expenses deduction.
For expenses that are completely unrelated to your home office—such as remodeling in other parts of your home or the addition of a pool—they’re never deductible. And you typically can’t deduct exterior expenses like yard work or gardening, even when you regularly see clients or vendors where you live.
See also: 5 Retirement Options When You're Self-Employed
Deducting Business Expenses
Also note that costs pertaining to your business, which have nothing to do with your home office—such as buying business insurance, a computer, and office supplies—are fully deductible as ordinary business expenses. They’re 100% deductible no matter where you run your business or work when you’re self-employed.
So, how you deduct an expense and how much depends on whether it benefits the entire home (such as electricity and water), just your office portion of the home (such as painting that area), or just your business (such as a computer or software).
But note that you can’t deduct more expenses than the amount of your business’ gross income. If your income from the business is less than your expenses, your deduction for certain home office expenses will be limited, but you may be able to carry over the excess to the next tax year.
You can probably tell that the rules for claiming tax deduction on your home office and business can be complicated. You can refer to IRS Publication 587 for more details. But my best advice is to consult with a qualified tax accountant to help you save the most money possible when you’re working from home.
See also: How to Create a Profitable Side Business (and Keep Your Day Job)
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