Many clients working from home because of the pandemic might be wondering what they can deduct for home-office expenses when they file their taxes next spring. But these deductions are tricky if not impossible to take and clients might want to look for quicker financial relief elsewhere, advisors say.
The Tax Cuts and Jobs Act removed the ability of W-2 workers to deduct office-in-home expenses. “If you’re an employee, the amount of deductions that you may claim is nada,” said Morris Armstrong, an RIA at Armstrong Financial Strategies in Cheshire, Conn.
The self-employed don’t face this limitation, he added. For the self-employed, tax rules still mandate that home-office space must be used exclusively for the job. “Your kitchen table does not qualify, nor does your bedroom,” Armstrong said, but “a small area with a desk may.”
The business can be full- or part-time to qualify, Dvorkin said, adding that home-office expenses that can be written off can be direct or indirect. Direct expenses include costs to set up and maintain an office. Indirect expenses include rent, renter’s insurance and utilities or, for homeowners, mortgage interest, property taxes, home insurance, utilities and maintenance. Business expenses unrelated to a home office, such as marketing, equipment, software, office supplies and business insurance, are also deductible.
Gig-economy contractors (who receive Forms 1099-MISC or 1099-NEC to document earnings) can also deduct office-in-home expenses, said Bill Nemeth, executive director of the Georgia Association of Enrolled Agents. These expenses during this pandemic wave of people working from home might include computer upgrades, a Zoom camera, a cloud-based backup tool, a VoIP phone and utilities that might be higher than normal, such as electricity during entire workdays for computers, home air conditioning or heat.
Clients can calculate their deduction one of two ways. The “actual expense” formula takes the total size of the home as the divisor and the work area as the numerator to find the fraction to use in figuring the deduction. For example, a 20-square-foot work area in a 1,000 square-foot residence produces a 2% allocation, or deduction, of the costs. The alternative formula, a “simplified” method, is based on the square feet of the home office, with a limit of 300 feet and a deduction of $5 per square foot.
IRS Form 8829 is used to file deductible expenses, with Schedule C, “Profit or Loss From Business.” No matter the method, taxpayers can’t deduct more than the net profit of their business. Consistently taking the home-office deductions can also complicate finances during any future sale of the home.
Reimbursement direct from an employer is the other course for a W-2 employee. “This is the best and only way to soften the blow of the additional costs,” Nemeth said. “Typically, the employee pays for the expenses and then submits documentation to request reimbursement.”
Some of the expenses are similar to those that are tax deductible. “The employer [can] reimburse the employee or supply any tools required,” Armstrong said. “This may include computers, paper ... and even a phone. The employer could even reimburse the difference in cost if the employee had to upgrade bandwidth.”
The method of employer reimbursement is also important. “If you are getting reimbursed for that chair or monitor, it belongs to the company, not to you,” said Lawrence Pon, a CPA/PFS/CFP at Pon & Associates in Redwood City, Calif.
“If you submit for reimbursement, this is known as an accountable plan,” Pon added. “This means the reimbursement is not taxable income and will be a business expense for the employer. Some employers are just giving their employees $500 for their home office. Since there are no receipts for reimbursement, that $500 is included as taxable income. In that case, the assets can be kept by the employees.”
During the pandemic, some employers are also supplying alternative, often rural, work spaces, Pon said.