Let’s start with the bad news. An employee cannot take a deduction for a home office. This is even true if the employee works from home for his employer. There is no office to work from. He or she works from home.
No deduction, not since the Tax Cuts and Jobs Act of 2017. This did away with miscellaneous deductions which included the home office deduction for employees.
How can an employee take the deduction?
The answer is simple. By not being an employee. The home office deduction is allowed, for example, for self-employed persons and independent contractors.
If an employee starts a business, even a side business, the home office is a legitimate deduction. The space needs to be used regularly and exclusively for business purposes. Most self-employed persons start off with Schedule C, Sole Proprietorships, and the deduction is one of the line items on that form.
The home office deduction in this case is calculated by first determining the home office percentage. Divide your home office square footage by the total square footage of your home. That home office use percentage is then applied to indirect expenses such as mortgage interest, property tax, utilities, HOA dues, repairs, and other home expenses. This is then reported as a home office deduction on Schedule C.
Is your business is operating in another type of structure? Here is how to take the home office deduction. HINT: It is NOT by paying a rental amount to yourself from your company.