People who are working from home in response to the coronavirus pandemic may be looking forward to claiming a home office tax deduction. However, most will be disappointed.
No Home Office Deduction for Employees
The home office deduction has always been a tough one for employees to claim. But now it is impossible.
In the past, employees could claim a home office deduction only if they worked at home for the convenience of the employer. In practical terms, this meant that the employer had to require the employee to work from home.
Now, however, an employee – that is, a worker who receives a Form W-2 from an employer – simply cannot claim a home office deduction for work done for the employer. This is because an employee’s home office deduction is a miscellaneous itemized deduction, and the Tax Cut and Jobs Act eliminated miscellaneous itemized deductions for 2018 through 2025.
As a result, employees cannot deduct home office expenses even if the employer requires them to work from home. Thus, when a workplace closes because of the COVID-19 pandemic and the employees start working from home, they cannot claim the home office deduction – even if they set aside a part of their home as an office–or a classroom or a studio or a presentation space, etc.
Home Office Deduction for Self-Employed and Independent Contractors
In contrast, self-employed workers and independent contracts may still claim a home office deduction as a Schedule C business expense. The taxpayer generally must regularly use the home office as a principal place or business or as a place to meet patients, clients or customers. Most importantly, the taxpayer must use the home office exclusively for business.
Of course, there are exceptions to these requirements, but they are pretty narrow. For example, these tests may be relaxed for taxpayers who use their homes to store inventory or operate a day care business.
Home Office Does Not Have to be a Separate Room
The home office deduction is not limited to formal offices. A home office may be a dedicated room, but it also may be a shed, a workbench, or another area that is not formally separated from the worker’s living space.
For instance, a desk in the kitchen or a corner in a bedroom may be a qualified home office, if it meets the business use tests discussed above. Obviously, it’s harder to meet the exclusive use test with just a portion of a room, but it is possible.
But Exclusive Use Test is a Big Hurdle
The exclusive use requirement is probably the hardest home office test for most workers to satisfy. Whether a home office is a separate room or part of a larger space, it does not qualify for the deduction if it is used for anything other than the worker’s own business.
So, for instance, a taxpayer cannot claim the deduction for a home office that is occasionally used as a guest bedroom. Similarly, an art studio that the artist’s spouse uses as a potting shed does not meet the exclusive use test.
Employees with a Side Business Must be Careful
The exclusive use test can be a bit of a trap for an employee who operates a business, and also starts working from home for an employer.
Imagine, for example, that Matilda is an accountant who operates her own small business preparing tax returns. She uses her den exclusively as her office, so it is well equipped with a desk, a comfortable chair, computer equipment and supplies, etc. She properly deducts her home office expenses on Schedule C.
Matilda is also employed by a large accounting firm. When her employer closes its office because of the pandemic, it arranges for its employees, including Matilda, to start working from home.
Since she is already doing her self-employed accounting work in the den, it would be natural for Matilda to do her work as an employee there as well. Doing so, however, would mean that she is no longer using the den exclusively for her own business. Thus, it would no longer qualify for the home office deduction.
By Kelley Wolf, J.D., LL.M.
Wolters Kluwer is by your side to help you stay up-to-date with tax and compliance changes and support your ability to work remotely. Please visit our Coronavirus (COVID-19) Resource Page for Tax & Accounting Professionals.