Home Office Deduction During Covid: 2023 Update
The pandemic has changed the lifestyle of people. Working remotely is now the norm. If you’re among the people working over your kitchen counter, and you’re wondering how you can claim home office deductions. Well, this article will shed a light on all your queries.
Working as a traditional employee will not make you eligible for this tax break. Suppose your home is exclusively used for self-employment regularly. In that case, you have a chance to deduct a portion of home-related expenses like homeowners insurance, mortgage interest, utilities, property taxes, among other things. Read on to discover more about home office deduction during Covid: 2022 Update.
What Is Home Office Deduction During Covid?
In layman's language, home office tax deductions are tax breaks that allow you to reduce your taxes by claiming the space in the house you use as an office, even if it’s a nook or a corner of the house. The space should typically serve as an administrative center for your business, which means the room should only be used for business. If it has some additional purposes like serving as an extra bedroom when guests arrive, then you won’t be eligible for such deductions.
You can calculate the deductions in two ways; the safe harbor and the regular method. In the safe harbor method, you’re allowed to deduct up to $1,500 based on the square foot of your office. On the other hand, the regular method allows you to use the exact costs of office furniture and other office supplies. You must, therefore, keep records of all your spending.
The tax deductions are given exclusively to small business owners and self-employed people. What’s included in the deductible expense is the spending you make directly to your office, like purchasing office supplies and accessories. You can also deduct a portion of expenses emanating from your home, such as your electricity bills, based on the total home office square foot percentage.
Who Qualifies for Covid Home Office Tax Deduction?
Even though many workers are working from home due to the effects of the pandemic, not all of them are eligible for a home office expense deduction (COVID). Just a subset of them can claim these deductions; if you’re self-employed or own a small business, you’re probably eligible to claim these deductions. According to the IRS, those who qualify for it are in three working categories; independent contractors, Gig economy workers, and the self-employed.
Can I deduct working from home during Covid if I’m a W-2 employee? The answer is no; in 2017, the Tax Cuts and Job Act suspended all write-offs for home office deductions through up to 2025. Basically, if you’re an employee who receives a W-2 from an employer, you’re not eligible for this tax deduction, even if you’re working from home due to Covid impacts.
You may also claim this tax break if you have self-employment income streams apart from your regular job. The deductible expense will only be from the self-employment task.
The Types of Office Spaces Eligible for These Deductions
Once you know you’re eligible for this tax break, you’ll have to look at your office to see if it meets the requirements for deductions. The office must abide by the following requirements:
- It must be a central point or space where all the administration tasks for your business are executed. If you’ve rented out another space to act as an office, then the home office is not tax-deductible.
- The space needs to be solely dedicated to working.
The Internal Revenue Service describes a home office as an in-house space that’s separated from the living area. It's only dedicated to work, meeting clients, bookkeeping, and other business-related tasks. You can claim the deductions irrespective of whether you own or rent your house. Whether it’s a condo, apartment, or story house, you'll be eligible for it. However, if you’ve been staying at a hotel or temporary housing for a year, you can’t claim this tax break.
Nonetheless, there are exceptions to the exclusivity part of the requirement. Suppose you often use your home to offer daycare services for children, people with disability, or the elderly. In that case, you can qualify for this deduction only if you have a valid certification, registration license, or any other document showing that you’ve been approved to operate such a business. You’re also exempted from meeting the exclusivity requirement if you're using your home to store product samples. However, your business must be related to the stored products, and your house must be your fixed storage location for your business.
Calculating the Home Office Deductions During Covid
As stated earlier, calculating the deductions can be done in two ways; simplified and regular methods. Let’s pick apart each method and see how different they are from each other.
The Simplified Method
According to the simplified method, the home office value is based on the total square foot of your office. This total square footage is then multiplied by $5. It’s imperative to note that the maximum amount is usually $1,500 because you can only deduct up to 300 square feet.
The simplified method is a nice option for taxpayers who don’t have a lot of business expenses or who have not kept a record of all their spending from their home office setup. A great disadvantage of this method is that you’re only required to deduct up to the value of your income even when the office expenses are way more than your gross income.
On the other hand, using the regular method allows you to carry losses over to the next tax year. If you’re providing daycare services, you’ll calculate your home office deductions during Covid by multiplying $5 with the portion of years your home has been used to offer the service. After you get the results, you multiply them by the square foot of your office.
You must calculate the portion of the year as a decimal. How do you get this decimal? Well, it’s the number of hours you provide the daycare service during a particular tax year, then divided by the total number of hours during that tax year.
The Regular Method
The regular method uses the actual expenses for home office essentials to determine the deductions. This method is useful if your expenses exceed the $1,500 threshold. The maximum deduction is your company’s gross income, but the good thing about this option is that you can transfer deductions and losses over to the next tax year.
You’ll, however, have to keep a record of all your spending all year round. It’s imperative to have a record of three years before the next tax year. Just in case the IRS decides to audit you. The records will prove your deductions are accurate. Most people fear claiming such deductions due to audits, which happens on rare occasions. Therefore, it’s prudent to keep records of the previous spending.
Calculate the deductions the normal way by using form 8829. The form allows you to itemize all expenses you’re trying to deduct, which sometimes is from your home and not from your home standing desk or office chair expenses. Good examples of these expenses are electricity and heating bills, but only the amount directly proportional to the square foot of your home office. If your home office is 15% of your house, you’ll need to put out 15% of these bills.
Expenses That You Can Use as Deductions
The IRS distinguishes three types of expenses with regards to home office tax deductions. They include:
Direct Expenses: These expenses emanate from your office, like buying a stapler or office desk, which is exclusively included in the home office deductions claim. Direct expenses include office furniture, office supplies, repairs, and maintenance costs for your office, among other expenses. Indirect Expenses: These are expenses for your whole home and not just your office. They can be electricity and heating bills. However, the bill should be equally proportional to your office's square. If your office is 15% of your house, you’re required to fill in only 15% of your entire bill. Indirect expenses include cleaning services, home utilities, internet, cost of installing and maintaining security, among other expenses.
Unrelated Expenses: They come from your home but don’t necessarily affect your business. You’ll not be able to deduct such expenses. Unrelated expenses can include lawn care, painting the external part of your house, and home office renovations.
Claiming Your Home Office Tax Deductions
The process of claiming your home office tax deductions will depend on the type of method you choose to calculate your deductions. If you calculated the deductions using the simplified method, you’ll use the simplified method worksheet, which is found on the Schedule C directives. Write the value of your home office deduction during Covid on line 30 of the Schedule C instructions.
It’s important to note that if you’re writing down deductions of various home offices, you’ll only use the simplified method on one and the regular method for the rest of them. While using the regular method, you’ll fill up the IRS 8829 form to calculate the exact deductions. After finding the deductions, you’ll then write down on line 30 on the Schedule C instructions.
You must fill out form 8829 for all your home offices and attach it to your complete tax return form. If you’re a multiple-member LLC or partnership, you’ll use the schedule E.
Itemizing Your Home Office Tax Deductions
The Tax Cuts and Job Act 2017 made it quite difficult for people to itemize. You can’t deduct costs of working from home as reimbursed employee expenses. When you use the simplified method to calculate the deductions, you’ll itemize deductions as you normally do. Conversely, you’ll not deduct the same spending on Schedule A and home office deductions when you use the regular method.
Let’s say you’ve deducted $5,000 for property tax as itemized deductions; you can’t deduct any amount of that portion to home office deductions during Covid. Moreover, if you can’t deduct the full amount of your tax properties due to that $10,000 limit on your local and state deductions, you’re allowed to use any excess tax properties for home office deductions during Covid. However, you’ll use only that portion of your house that was used as an office.
Is the IRS Taking a Harder Look at Deductions in 2022?
According to Garrett Watson, a senior policy analyst at Tax Foundation, it's hard to give a definite answer. However, W-2 employees working from home who don’t have other income streams are going to be considered by the IRS. He says: “It’s going to be hard for the IRS to determine improper use for self-employed filers.” “The IRS has devised ways like checking if it’s a first-time deduction to see if there are potential issues.”
Is the Government Going to Increase Eligibility?
Most people are working from home due to Covid. Maybe, you’re wondering if there’s going to be an expansion in eligibility. “Well, it doesn’t seem so. The government has devised other relief efforts to help out people who have been affected by the economic fallout due to Covid. If the pandemic continues to sour on, then there is a probability the government can put up other tax changes, including tax breaks due to home office expenses,” says Steber.
The Downside of Home Office Deductions During Covid
The drawback will not emanate from the home office deductions themselves but rather the self-employment tax. Small business owners and the self-employed are taxed a percentage of 15.3 to the first $142,800 on their wages, net earnings, and tips. The threshold is quite low; if you’ve received at least $400 or more as a self-employed individual or small business owner, for example, you’re still on the hook to pay this tax.
Suppose you want to weed out all the issues from home office deductions and other business expenses. In that case, you can easily check out IRS Form 8829. However, other reputed tax software packages can put you in the best position to claim your home office deductions during Covid, together with other tax-related deductions - especially those that deal with insurance premiums and retirement savings.
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