Many people worked from home in 2020, but only some are eligible for the home office tax deduction.
The number of people who worked from home exploded in 2020 because of the COVID-19 pandemic. Some people will be able to take a tax deduction for their home office expenses, but many will not. The law changed in 2018 and eliminated the home office deduction for people who work for an employer. You can only qualify for the home office deduction now if you're self-employed. You're not eligible if you're an employee, even if you've been working remotely and had to set up an office in your home.
Some employers have been mistakenly telling employees that they can deduct their expenses to set up a home office when their employer closed their office building and had the employees work remotely. If you're an employee, these expenses are not tax-deductible.
But you may be eligible for the home office deduction if you have any income from self-employment – whether you're a freelancer or had a side gig last year, if you are starting your own business, or even if you did self-employed consulting work for a few months between jobs. The rules are strict for the office to qualify. Here's how to find out whether you're eligible for the break and what expenses you can deduct.
Who Is Eligible for the Home Office Deduction?
Self-employed people can deduct their home office expenses from their business income if their office qualifies. This includes people who work from home full time, as well as people who have a freelance side gig – even though they may also work for an employer – and people who were self-employed for just a few months.
Does Your Home Office Qualify for the Tax Break?
Your home office must also meet certain standards to be eligible. To qualify for the home office deduction, you must use part of your home "regularly and exclusively" for business. Your office doesn't need to be in a separate room, but it has to be in an area of your home where you don't do anything else. It can be a dedicated nook in the corner of your basement, for example, but it can't be the kitchen table where your family also eats.
The space must also be your principal place of business or a place where you meet regularly with clients or patients. It doesn't have to be the only place where you do work – it can be the place where you usually do administrative activities for your business, for example.
How Do You Calculate Your Home Office Deduction?
There are two options for taking the deduction. The simplified option is easier but may result in a smaller tax break. The standard option requires more complicated calculations and recordkeeping but could give you a larger deduction.
The Standard Option: With this method, you deduct your actual expenses. You can deduct 100% of some of your home office expenses, such as the cost to paint or make repairs to that specific area. You can also deduct a portion of some overall house expenses based on the area of your home that you use as a home office. For example, if your home office is one-tenth of the square footage of your house, you can deduct 10% of the cost of your mortgage interest or rent, utilities (such as electric, water and gas bills) and homeowners insurance). You can also deduct 10% of other whole-house expenses, such as cleaning and exterminator fees.
You can also deduct a portion of your property taxes and depreciation on the home.
The Simplified Option: The IRS introduced a simpler option for deducting home office expenses in 2013. Instead of keeping records of all of your expenses, you can deduct $5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $1,500. As long as your home office qualifies, you can take this tax break without having to keep records of the specific expenses.
How Do You Take the Deduction?
If you use the simplified method, you take the deduction directly on Schedule C reporting your business income and expenses. If you choose the standard method, you must submit Form 8829 with your income tax return and then report the total deduction from your business income on Schedule C.
What if You Are Self-Employed for Just a Few Months?
If you were self-employed for just a few months – for example, if you did some consulting while looking for full-time work – then you may be able to take a partial home office deduction.
If you use the simplified deduction of $5 per square foot (up to 300 feet), you can prorate the amount based on the number of months you worked from home.
Or you can deduct a portion of your actual expenses (such as mortgage interest or rent, utilities and homeowners insurance, based on the percentage of your home's square footage that you use as a home office) for the months when you're working from home.
No matter how long you work in the home office, the space must be regularly and exclusively used for business during those months. Keep this requirement in mind if you're setting up a temporary office in your home, even if you don't plan to start your own business permanently: It doesn't have to be a separate room, but it has to be a space you use exclusively for your business.
What Other Home Office Expenses Are Tax-Deductible?
If you're self-employed – even if you're just doing some freelance work – you may be able to deduct other expenses for setting up an office in your home, too.
For example, the cost of buying a computer (based on the portion of time you use it for business), printer, secure modem, office desk and chair, file cabinets, and even lighting for Zoom calls you make for your business can be tax-deductible as a business expense on Schedule C.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.