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Understanding the Home Office Tax Deduction
The COVID-19 pandemic forced millions of employers and their staff to adjust to impromptu remote work and home office situations. With this change, many are seeing an increase of costs related to internet, power, and other utilities. As tax season is now in full swing, we are fielding questions from organizations and individuals wondering whether remote work situations qualify for the home office Federal tax deduction. In the following, we break down the basics for you.
Home Office Deduction for the Self-EmployedIf you are an independent contractor, a sole proprietor, or self-employed, and you use a portion of your home exclusively and regularly for business, you could be entitled to home office deductions. There are several expenses that potentially fall under this umbrella, including electricity, water, gas, trash collection, maintenance, depreciation, repair, internet, insurance, rent, real estate taxes, mortgage interest, and the costs of installing and maintaining home security systems. Beyond utilities, if you have made improvements to your home to accommodate your work situation, you may be able to deduct these expenses as well. Purchases like furniture, computers and accessories, and general office supplies may qualify. Listed properties, or items used for both business and personal, must be utilized more than 50% annually for depreciation to be claimed on the business-use portion or be deducted as an applicable expense. These include your phone system, some furniture and computers, and peripheral equipment like wireless routers, desktop cameras, and printers. If the listed property is not used more than 50% for business, then you can only use the slower “straight line” depreciation method, and you cannot deduct it under the expensing provisions. However, if they were placed in service after 2017, they may be eligible for regular depreciation, or they can be deducted in full without having to meet the 50% business use test. If you want to claim your deductions, you have to use part of your home for one of the following:
- Regularly and exclusively as a primary place of business for a trade or a business.
- Regularly and exclusively as a place where you meet with clients, patients, or customers in the normal course of a trade or business.
- As a separate structure not attached to the home, used regularly and exclusively in connection with a trade or business.
- Regularly for storage, inventory, or product samples that are used in a trade or business of selling products at retail or wholesale.
- For rental use.
- As a daycare facility.