With so many taxpayers working from home—some indefinitely—do to Covid-19, many are likely wondering whether they can deduct their home office expenses. In short, traditional W-2 employees cannot deduct their home office expenses regardless of whether they would otherwise qualify for the deduction. The 2017 tax reform legislation eliminated this deduction for 2018-2025. Self-employed taxpayers can deduct expenses associated with maintaining a home office if the office is used regularly and exclusively as the taxpayer’s principal place of business (if the office is within the dwelling unit). A home office deduction is permitted for self-employed taxpayers with separate structures if the office/workspace is used “in connection with” the trade or business.
When is a taxpayer entitled to deduct expenses incurred in maintaining a home office?
A taxpayer is only entitled to deduct expenses for a home office if the taxpayer is able to meet the restrictive requirements imposed by the IRC and the courts with regard to this business deduction. A deduction for use of a part of the taxpayer’s residence as an office will not be allowed unless a portion of the dwelling is used exclusively and on a regular basis as (a) the principal place of business for any trade or business of the taxpayer; or (b) the place of business used by the taxpayer for meeting patients, clients or customers in the normal course of the taxpayer’s business.1 If the taxpayer uses a separate structure as a home office, the use requirements are less restrictive and the use must only be “in connection with” the taxpayer’s trade or business.2 A home office will qualify as a taxpayer’s principal place of business if both of the following are true:
(1) The taxpayer uses the home office exclusively and regularly for administrative or management activities of the trade or business; and
(2) The taxpayer has no other fixed location for conducting substantial administrative or management activities of the trade or business.3
That a taxpayer chooses to have a third party perform administrative or management activities (such as billing) for the taxpayer will not, in itself, cause a disallowance of the deduction.
Example: Josh is an electrician who is self-employed.Most of his time is spent on-site with customers examining and repairing their electrical systems, but he maintains a small office in his home that is used exclusively and regularly for activities such as ordering supplies, calling his customers and keeping his books.Josh writes up estimates and records of work completed on-site at his customers’ premises.He has engaged a local bookkeeping service for billing his customers, but he does not conduct any other substantial administrative or management activities outside of his home office.His home office will qualify for a home office deduction.
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