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How Does COVID-19 Impact Home Office Deductions?

10/08/2020 Jami Vallandingham, Lisa Riccardi

Have you been working from home during the COVID-19 crisis? Join the club. Approximately 42% of the American workforce is currently working from home full-time, according to a recent study by the Stanford Institute for Economic Policy Research. Only 26% are working on business premises — and many of those are essential workers, such as public servants and health care workers, who can’t work from home.

People who have transitioned to work-from-home arrangements may wonder whether they can claim a federal income tax deduction for home office expenses. Under current law, you’re not allowed to deduct these expenses — unless you’re self-employed. However, things could change if Congress grants additional COVID-19-related tax relief.

How the Rules Have Changed

For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) suspended write-offs for miscellaneous deductions that were formerly subject to the 2%-of-AGI rule. So, under current federal-income-tax law, an employee’s home office expenses aren’t deductible.

Before the TCJA, an employee could potentially claim itemized deductions for unreimbursed employee business expenses, including home office expenses — if the office was used for the convenience of the employer. However, unreimbursed home office expenses had to be combined with other miscellaneous expenses, such as union dues and fees for investment advice, tax advice and tax preparation. If your total miscellaneous expenses exceeded 2% of your adjusted gross income (AGI) for the year, you could write off the excess — but only if you itemized deductions. 

The old pre-TCJA rules are scheduled to go back into effect in 2026, unless Congress extends the TCJA provisions.

Better Story for the Self-Employed

Self-employed people can still deduct home office expenses for federal income tax purposes under the same rules that applied before the TCJA. Specifically, home office deductions are allowed if you use part of your residence during the tax year regularly and exclusively as:

  • A principal place of business, or
  • A place to meet with customers or clients.

In the case of a separate structure — such as a converted barn, pool house or detached garage — deductions are allowed if you simply use the space regularly and exclusively for any business purpose.

Important: The term “exclusively” means you use the office space only for business purposes for the entire year.          

A home office qualifies as your principal place of business if most of your income-earning activities occur there. It can also be your principal place of business if you use it to conduct administrative or management functions, such as bookkeeping and processing invoices, and you don’t conduct those functions at any other fixed location.  

The best way to prove regular and exclusive use is to take photos of the office space. If all that can be seen in your office is your desk, computer, bookshelves and other office equipment, the IRS will be hard-pressed to challenge your write-offs. However, you won’t necessarily be disqualified for having a couch, some chairs, a television, a bathroom and even a wet bar in your home office. After all, these things can be found in the offices of many corporate executives.

Rules for Direct Expenses

Self-employed expenses that are directly allocable to the home office space, such as repair and maintenance costs, are fully deductible as long as you don’t run afoul of the business income limitation. That rule limits your allowable home office deductions to the gross income from your business activity reduced by:

  • Other expenses for which deductions are allowed in the absence of business use (such as home mortgage interest and real estate taxes), and
  • Business deductions that aren’t allocable to the use of the home (such as advertising and supplies).

If some of your home office deductions are disallowed under this business income limitation, the disallowed amount is carried forward to the following tax year, subject to the same limitation in that year. If you have any questions, please contact your VonLehman tax advisor.

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