By Dolly Rajani, Tax Supervisor, CPA
2020 is especially unique with respect to this deduction since COVID-19 has altered employee workspaces forever it seems. The primary office for many employees is now their homes, with many not having even set foot into their regular office since the pandemic was declared. This means that this year, more than ever before, taxpayers need to revisit the rules surrounding Form 8829 (Expenses for Business Use of Your Home) and the related eligibility requirements.
Who Can Claim the Business Use of Home Deduction?
- Self-employed individuals/Sole-proprietors (Schedule C filers)
- Partners in a partnership
Please note that most W-2 employees can no longer claim this deduction due to the recent TCJA ruling regarding the suspension of the miscellaneous deduction subject to the 2% AGI floor, thus S-corporation (owner) shareholders should establish an effective plan to have home office allocated expenses reimbursed.
How do Taxpayers Qualify for the Business use of Home Deduction?
- There must be an “exclusive” use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business. You cannot deduct expenses for any part of your home that you use for both business and personal use.
- The home must be the taxpayer’s principal place of business. A taxpayer can meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these specific duties. Therefore, someone who conducts business outside their homes may still qualify for a home office deduction as long as they continue to perform specific duties regularly from home.
What Constitutes as a Home for the Deduction?
- House, apartment, condominium, mobile home, boat, or similar property.
- Structures on a property such as an unattached garage, studio, barn, etc.
It does not include any part of taxpayer’s property that is used exclusively as a hotel, motel, inn, or similar business.
Form 8829 qualifying expenses include mortgage interest, insurance, utilities, repairs, maintenance, depreciation, and rent. Expenses that relate to a separate structure not attached to home will not qualify for a home deduction unless the structure is used exclusively and regularly for business.
How do you Calculate the Home Office Deduction?
- Simplified option – The simplified option uses a rate of $5 per square foot for the area of the home designated for business use. The maximum business use area for this option is 300 square foot and is capped at a maximum deduction of $1,500. For example, a 200 square foot office would receive a deduction of $5 * 200 = $1,000.
- Regular method – Under this method the allowable deduction is based on the percentage of the home used exclusively for business. This percentage is then used to calculate the amount of indirect expenses, while direct expenses are deducted in full. Indirect expenses include mortgage interest, utilities, landscaping, and other expenses related to the entire home – generally these items are shared with the non-business use portions. Direct expenses (those relating to the workspace itself) may include repairs and maintenance to the business area itself, such as painting. For instance, for a taxpayer with a 1,000 square foot home who uses 100 square feet exclusively as his/her home office would generate an indirect expense deduction equal to 10% of the total qualifying indirect expenses. In addition, the taxpayer would also claim a 100% deduction for any applicable direct expenses paid.
Lear & Pannepacker’s professional tax services can help ensure compliance and maximize your business use of home deduction. For up-to-date forms and information regarding Form 8829 please visit the IRS website:
If you have any questions on this topic, contact the team at Lear & Pannepacker.