Who Gets to Take the Home Office Deduction? | USTaxAid Who Gets to Take the Home Office Deduction? | USTaxAid

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Who Gets to Take the Home Office Deduction?

Written by Diane Kennedy, CPA on December 29, 2022

Over 10% of the US workforce now works from home. Most people enjoy taking a break from the daily commute, but it does mean that the worker now has to set up a place to work from home. That means a desk, comfy chair, computer, Internet, and quite likely a quiet place. (This last requirement might be the hardest of all to fulfill.)

Most people need a home office. And that leads to a big question we are seeing a lot these days. How do you take a deduction for your home office?

For workers who are W-2 employees, the answer is that they cannot take a deduction for their home office. That has been the law since the Tax Cuts and Jobs Act of 2017 (the Trump Tax Plan) became law 1/1/2018. Prior to that employees could take some deductions for expenses related to their work as miscellaneous itemized deductions. But effective 1/1/2018, the ability to take most miscellaneous itemized deductions went away.

The Home Office Deduction Still Exists for Some People

The home office deduction still exists for self-employed people and business owners. In order to take the deduction, you need a space that is regularly and exclusively used as a place of business. It is okay to have another place of business, as long as your home office meets those two requirements. Regularly and exclusively.

There are two different ways to calculate this write-off. The first way takes a little more work, but you end up with bigger advantages.

Home Office Calculation #1:
Determine your business percentage of your home. Calculate your business square footage for your home office and then divide that by your total home square footage. This is your business percentage.

Add up all your indirect home expenses. This includes your mortgage interest, property tax, rent, HOA dues, utilities, repairs, landscaping and the like.

Apply that percentage to the total of the indirect expenses.

Option #2 is easier, but does have a “gotcha” in it.

You still need to calculate the business square footage and then rather than tracking indirect expenses, you multiply that by $5/square foot up to a $1,500 maximum write off.

The Simplified Home Office Deduction Gotcha

The simplified home office deduction has a couple of gotchas. First, it tops out at $1,500 per year. To understand the second gotcha, we need to talk about how the home office deduction works for Sole Proprietorships (Schedule C).

The home office deduction is reported differently depending on what type of business structure you have. In case of a Sole Proprietorship, the loss is reported on Form 8829 and flows through to Schedule C on your personal return. The home office expense cannot be used to create and/or increase a loss.

If you use the simplified method, the excess home office deduction is lost. If you use the actual method, any unused excess home office deduction rolls forward. It’s not lost.

Employee AND Business Owner Both

What if you are an employee and a business owner as well? The employee part of your tax return cannot take a home office deduction. The business owner part of your tax return can.

Make sure you report the home office deduction correctly, based on the type of entity that you have.

When and Where Should You Take a Home Office Deduction

Got a question about your home office deduction, business deductions, or any other aspect of your tax life? Join Wednesday Coaching! You can ask your questions live during our 1st – 4th Wednesday 5 pm Pacific course or send them in ahead of time to Coaching@USTaxAid.com. One of the biggest challenges that business owners and real estate investors have is determining WHAT to tell their CPA. That is the purpose of the Wednesday calls. You will get ideas about tax saving strategies and know how and when to implement them. Plus, you will learn idea for future planning.

The more you know, the more you save in taxes.

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