With an increase in individuals working from home, we have seen questions arising about home office tax deductions. It is important to distinguish the difference in deductions available to employees and those that are self-employed.
Under the Tax Cuts and Jobs Act (TCJA), employee business deductions, including home office tax deductions, were suspended through 2027. Employees could instead be reimbursed by their employer if they have such a policy. Businesses can continue to deduct reimbursements to their workers for home office expenses if they have a policy that accountable business expenses can be reimbursed.
For a self-employed taxpayer to take a home office deduction, they must have a separately identifiable space used regularly and exclusively for their business. A home office is not required to be a separate room if it meets the requirements. The taxpayer may conduct more than one business out of the home office and still be eligible for a home office deduction but using it for employment-related activities would disallow the deduction. Self-employed workers can take advantage of this deduction if they rent their home or if they rent a separate office. Maintaining a home office while renting additional space can allow more transportation expenses to be deductible. Ordinarily, commuting to and from work is not deductible, but, if the home office qualifies as the principal place of business, any commuting done for business purposes would be deductible. To qualify as the principal place of business, the taxpayer must conduct substantial administrative and management activities in the home office, even if those activities could be done at another location.
There are two methods to calculate the home office deduction. The first allows a $5 per square foot of the home office deduction. The second allocates expenses of the entire home based on square feet in addition to expenses directly attributable to the home office. Depreciation expense is allowed if the taxpayer owns the home, however, this could cause further tax implications in the future if the house is sold. Self-employed workers should consult their tax advisor in determining the appropriate home office deduction to take.