California recently imposed a “shelter-in-place” requirement in several major cities including San Francisco. This means that workers at major companies such as Google, Facebook, Airbnb, and Stripe are working from home now. Many companies that had partial or full remote cultures, and cryptocurrency companies like Kraken, Gemini, and Blockstack have mandated work from home as well. One cryptocurrency company in particular, Coinbase, publicly released detailed coronavirus plans. At the time of posting, we do not know how long people will have to work from home; currently, San Francisco workers are looking at three weeks, but depending on the situation this could escalate to several months or more.
One upside to this chaotic time is learning about tax deductions you can claim if you are working from home. In this post, we will explore the “home office tax deduction” provision in the US tax code and steps you need to take to benefit from it.
In simple terms, home office tax deduction allows taxpayers to deduct a portion of expenses related to carrying out your business from home. These include allocable share of internet fees, electricity bill, rent, repairs, mortgage interest, insurance, and more.
Home Office Tax Deduction For Self-Employed Workers
Before we dive further into this topic, unfortunately, if you are an employee, you are not eligible for this deduction. This deduction is mainly for self-employed professionals who are now working from home instead at the employer’s office. To be eligible, you have to use a portion of your home exclusively and on a regular basis for business purposes. These are two easy conditions to meet because many workers have been mandated to practice social distancing and work from home. In some cases, it may even be worthwhile considering converting from an employee to a contractor to get advantage of this deduction and unlock other tax benefits applicable to contractors.
The easiest way to calculate your home office tax deduction is called the “Simplified Method.” The IRS allows taxpayers to deduct $5 per square foot (up to 300 square feet) of home used in carrying out your business.
For example, if your work from home area is 100 square feet, your deduction would be $500 ($5 x 100 square feet). The deduction would be reported on Schedule C, line 30.
If your work from home area is more than 300 square feet, you can use the “Regular Method.” This allows taxpayers to deduct the portion of expenses allocable to your home office based on the square footage. For example, if your work from home area is 400 square feet and your total home is 2,000 square feet, you would be able to claim 20% (400/2,000) of your home-related expenses (internet fees, insurance, taxes, mortgage interest, etc.) as a home office deduction. The deduction would be reported on Form 8829.
The following chart shows a decision tree you can follow to see whether you are eligible for the deduction:
Tips To Maximize Your Deduction
If you are following the Simplified Method, make sure to accurately measure your home office and document the date you started working from home. Since you can deduct up to 300 square feet, it is a wise idea to expand your work from home space up to 300 square feet to get full advantage of the deduction under this method.
Taxpayers using the Regular Method need to be more careful about record keeping. This involves keeping detailed records of the utility bills and other business related expenses. The IRS website has a side by side comparison of these two methods.
Disclaimer: this post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.