The rise of the remote workforce has been a long time coming; however, COVID-19 was like a rocket booster, powering a surge in the Work-From-Home movement. While there has been some “correction” as lockdowns have eased and workers return at least partly to their offices, the WFH trend is undeniable. And, moreover, it shows no signs of subsiding. After all, this work arrangement has evolved alongside the technologies that power it. Public health concerns and government mandates have only accelerated the phenomenon.
Prior to the pandemic, full-time telecommuters stood at a healthy 17%. A few weeks into the national emergency declaration, last April, that number climbed to more than half of the workforce! If one accounts for part-time WFH workers, the percentage rises to a whopping 66%. By the time November rolled around, the percentage of workers aged 18 and older who were in the WFH category had already dropped to 37%. Still, only society-altering events (like pandemics) would power a sustained 20-plus percent swing of this sort, which reflects a fundamental change in the way that we work.
So, why are we talking so much about the WFH shift?
As more workers find themselves in this situation, and as April 15 inches ever closer, a chorus of questions are emerging related to: “To deduct or not to deduct?” The home office deduction represents one of the perennially stickiest of deductions. Just because one works from home, doesn’t mean his or her office in the home qualifies for the deduction. Also, the amount one may recoup through this deduction can vary considerably from office to office and taxpayer to taxpayer. Factors that can affect the type of deductions and the amount of savings that you might secure, include how you file/your tax status, how you use the office, your profession, and other types of expenses and that may qualify for home tax savings.
Though, in a far-from-precedented Small Business Week last September, the IRS promoted the home office deduction, encouraging individuals to take the home office deduction if they qualify.
“The benefit may allow taxpayers working from home to deduct certain expenses on their tax return,” the agency noted. “The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy.”
A familiar refrain while delving into WFH tax opportunities, however, was alluded to by the IRS; the Tax Cuts and Jobs Act (TCJA) signed into law in December 2017, suspended the use of the home deduction until 2025 for employees who receive a paycheck or W-2 exclusively from an employer. Even if they are currently working from home, the employees are not eligible. And, yes, this restriction applies even for those investments that you were forced to make by government mandates and/or your employer. We appreciate that this situation will resonate with many employees, who had to set up home offices for the first time. There is one exception to the rule. More on that later.
The IRS highlights two bread and butter requirements:
A portion of the home must be used exclusively for business purposes on a consistent, regular basis.
The home must be the taxpayer’s “principal place of business” or trade.
Additionally, the office does not have to be within the main structure of the house. It can include an unattached garage or other structure that is on your property. Again, the structure that is used as your office must function exclusively and regularly in connection with a trade of business. Other qualifying set-ups include those workers who rent the property, or who use it as a daycare facility, or for business-related story and inventory. Attached properties that are used for other money-making ventures, such as lodging, do not qualify. And, the biggie here: No, that “sometimes office” which also doubles as your child’s playroom, guestroom or any number of other functions is not a qualifying home workspace as outlined by the IRS.
Qualifying expenses
Think of all of the items that you would typically use for business, when said trade occurs off site or away from the home. These expenses might include taxes on real estate, rent, mortgage interest, utilities, insurance, depreciation, and maintenance and repair fees. Keep in mind that the expenses only qualify when they reflect the portion of the property used as the office. So, those parts of the home that are not used for business cannot be claimed for example, lawn care or home improvement and upgrades to rooms that are not used for consistently, regularly and exclusively for business.
This may sound limiting, but there are some surprising opportunities. Consider that your apartment or other type of housing may have an open floor plan. Now, the portion of the open floor that is used only for work may still qualify for the deduction just fine, even if it is a simple space with a desk and chairs surrounded by other spaces that are used for different functions within the home.
How to deduct
Measure the size of the room of space that is used exclusively for work. The deduction is calculated at a rate of $5 per square foot. This simplified option reflects the easiest way to claim the deduction; up to 300 square feet can be deducted. At a rate of $5 per SF, that amounts to a maximum of $1,500.
Now, for those who know their deduction is valued at $1,500-plus, there is another formula that may be used: the regular method. In these cases, the deductible expenses may be calculated from the percentage of the home used solely as the office. Say, your office spans 10% of your home’s footprint. Simply deduction 10% of the total expenses that are used on the office’s operations, to support it. Again, this involves considering the expenses that are eligible and contribute toward the running of your home office. The largely break down like this:
Equipment – Furnishings, electronics, computers, other office machinery
Data – Deduct the amount of the Internet costs that are used for the business
Home – As referenced earlier, qualifying expenses span rent, mortgage interest, taxes, insurance, repairs, and utilities
Depreciation – This item warrants a little more detail; most equipment that is used to support the business can be depreciated over five years (office furnishings may depreciation for seven years). Deduct the full amount, or incrementally subject a portion of it each year.
Remember how we said W-2 employees are generally not eligible for the home office deduction? Well, there is one notable exception: Those readers who double as gig employees and W-2 employees can deduct eligible home office expenses. Now, those expenses must be related to the particular side gig. These could be related to investments that support the maintenance of the car that is used to shuttle Lyft and Uber passengers.
Some W-2 employees may still be in luck. There are other channels to potentially benefit from the home office shift and to secure some savings. These channels just depend on how amenable your employer may be to the likes of Section 139. So-called “reasonable and necessary costs” incurred by employees due to the pandemic may be reimbursed by the employer tax-free, at his or her discretion. A few examples of reasonable and necessary expenses might include buying a desk. So, you can work from home. Or, upgrading to faster Internet. So, your productivity does not suffer. Keep in mind that any reimbursements are fully deducible for businesses, which can be a great carrot for your employer. If your employer isn’t familiar with an accountable plan, maybe he or she should be, as this a portion of your salary may be diverted towards a home office reimbursement. Your salary remains the same but, with the reimbursement, you would actually save some money on your taxes on top of it. Also, we all know how food and beverages purchased for business meetings or even virtual happy hours can add up. These working meals may be deductible, too. Point this out to employers who may be hungry for more great tax deductions.
The take-away
As you can see, there are a lot of gray areas when dealing with tax savings and WFH. We haven’t even touched on how those self-employed workers with offsite office locations prior to the pandemic may be ineligible if that location never closed. Essentially, the original offsite office may still be considered the primary workplace even if you’ve been WFH since the onset of the pandemic and are your “own boss,” so to speak. The array of requirements, exclusions and potentially murky areas underscores the importance of working with professionals who speak the language of taxes.
For more than 70 years, O’Donnell, Ficenec, Wills & Ferdig’s CPAs have been partnering with organizations of all types and sizes from throughout the metro. Don’t assume or guess on something as important as tax liabilities and compliance.