Are There Tax Benefits to Working from Home?
One of the consequences of the Covid-19 pandemic is a massive increase in the number of people who have begun to work from home. As a result, I have had numerous inquiries into whether any tax benefits exist for such situations, in particular with regard to expenses for maintaining a home office, which many have heard could be deductible.
Employees
If you're an employee who "telecommutes", that is, you work at home, and communicate with your employer mainly by telephone, e-mail, fax, electronic data transfer, express mail services, etc., you should know there are normally strict rules that govern whether you can deduct your home office expenses.
Unfortunately, for years 2018 – 2025, due to the Tax Cuts and Jobs Act (TCJA), home office expenses for employees are not deductible for federal purposes, along with any other employee business expenses. Such expenses are miscellaneous itemized deductions, which per the TCJA became nondeductible for these years.
That said, employee business expenses are still deductible in many states, including Arkansas, so you may still get to take such deductions on your state return, if you meet the requirements about to be discussed later in this article.
As an employee, you also have to meet a "convenience of your employer" test. While there are a few specific tests to meet, in general, the convenience of the employer requirement means that you must maintain your home office for your employer's convenience, and not for your own. This requirement isn't satisfied if your use of a home office is merely "appropriate and helpful" in doing your job.
Self-Employed
If you're self-employed and satisfy the rules discussed below, you will be entitled to home office deductions, specifically, above-the-line business expense deductions for:
- the "direct expenses" of the home office; for example, the costs of painting or repairing the home office, depreciation deductions for furniture and fixtures used in the home office, etc.; and
- the "indirect" expenses of maintaining the home office, such as the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.
In addition, if your home office is your "principal place of business" under the rules discussed below, the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs.
So, what are these strict tests that must be met? To take the home office deduction, you will need to meet one of three tests; the principal place of business test, the place for meeting patients, clients, or customers test, or the separate structure test. You may also deduct the expenses of certain storage space if you qualify under the rules described further in just a bit.
Principal place of business. This test is met if you use your home office, exclusively and on a regular basis, as your principal place of business. These terms "exclusively", "regular", and "principal" are tricky ones, and are often subject to IRS dispute. In general, however, your home office is your principal place of business if it satisfies either a "management or administrative activities" test, or a "relative importance" test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
Home office used for meeting patients, clients, or customers. You're entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.
Separate structures. You're entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that's located in a separate unattached structure on the same property as your home; for example, an unattached garage, artist's studio, workshop, or office building.
Space for storing inventory or product samples. If you're in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.
In closing, if you meet the applicable tests, the home office deduction certainly can result in valuable tax savings. There is also a simplified deduction method where, instead of tracking actual expenses, you simply take a standard deduction of $5 per square foot of the qualifying space.
You should also be aware that there are limitations to the amount of the deduction you can take in a single year, including one based on the income attributable to the activity in which you use your home office, although any expenses not allowed in a given year can be carried forward and used in a future year when there is enough income.
And finally, if you subsequently sell your home, the home office deduction will not disqualify you from taking the sale of a principal residence gain exclusion, but the exclusion won't apply to the portion of your profit equal to the amount of depreciation you claimed on the home office.
