Qualifying for a home office tax deduction during the coronavirus crisis

As America tries to contain the spread of COVID-19, businesses have made tough decisions to stay afloat and maintain a healthy work environment for employees. Now, millions of Americans find themselves working from home — and they’re the lucky ones.

For those who are still on the job, this sudden change in work-life balance has left many wondering if there will be additional compensation during the coronavirus pandemic, in the form of tax breaks and deductions, as they dust off their home offices and begin to stash receipts.

Common COVID-19 home office deduction questions

Although there are tax deductions in place for people working from home, they won’t apply to most remote employees during this pandemic. While Congress has made some changes in tax law due to the coronavirus, home office deductions and other miscellaneous itemized deductions were not included in recent legislation.

Therefore, you probably won’t be able to claim any recent costs incurred from setting up or maintaining your home office. That is — unless you fall into one of the groups below.

Q1. Who can take a home office deduction or claim home office expenses?

There are two situations where you might be able to take the home office deduction or claim home office expenses.  If you are:

• An independent contractor or self-employed, you’ll be able to claim the home office deduction. Review the next question for details.
• An employee who falls into one of the below employment categories; you can take an unreimbursed employee expense deduction. Skip ahead to question 4 below for details.
  • Armed Forces reservist (a member of a reserve component)
  • Qualified performing artist
  • Fee-basis state or local government official
  • An employee with impairment-related work expenses

Q2. What qualifies as a home office deduction during the coronavirus? (applies only to independent contractors/self-employed individuals)

With the abrupt switch to working remotely, people are suddenly setting up impromptu home offices everywhere from spare bedrooms to living room couches to actual office rooms. But are these “offices” deductible?

For your home office to be deductible, you must:

1. Use part of your home regularly and exclusively for work
2. Conduct most business from your home office

To meet the exclusive use requirement, you must use a designated area in your home for business, and business only. This space doesn’t need to be marked off by a permanent partition; however, you won’t meet the requirement if you use it for both business and personal purposes.

The second requirement of the home office deduction involves proving your home is the location for essential activities to your trade or business during the time frame in question, even if you have other locations. Your home office might be the principal place of business, a place you meet patients, customers, or clients, or a separate structure.

Q3. Can you deduct business use of home expenses if you’re an independent contractor/self-employed?
What about if you’re self-employed? That situation can be a bit more complex. This flow chart from IRS Publication 587 can help you determine whether the business use of your home is deductible. Keep in mind there are some exceptions to this, but it will give you a good idea of where you stand.

Q4. How do unreimbursed employee expenses work? (applies only to the four specific employment categories above)

If the unreimbursed employee expense deduction sounds familiar, you might recall taking it prior to 2017 tax reform. However, when the Tax Cuts and Jobs Act (TCJA) passed, many tax rules changed — including the ability for most employees to take an unreimbursed employee expense deduction.

Qualified expenses must be ordinary and necessary, meaning that they should be commonly accepted and appropriate for your trade, business, or profession (though they don’t have to be required or indispensable.)

These tax changes are in place until December 31, 2025.

Q5. How does a home office deduction work? (applies only to independent contractors/self-employed individuals)

If you file Schedule C (Form 1040) to report your business income, use IRS Form 8829-Expenses for Business Use of Your Home to deduct your actual home office expenses. Or, you might choose to use the simplified method for home office deductions, which is based on the square footage of your space.

If you file Schedule F (Form 1040) to report farm income, you’ll include the home office deduction on Schedule F.

Still have questions? We’re here to help

If you have a tax pro and want to ask questions about home office tax deductions or have other coronavirus related tax questions, schedule a call with your tax pro. If you don’t have one, find a tax pro today.

In the meantime, keep track of your expenses (just in case), take a deep breath, and buckle up because the year of COVID-19 will be nothing short of a wild ride.