If you’re an employee who’s been working from home during the past year because of the pandemic, you might wonder what tax deductions are available.
The bad news: You can’t take any deductions if you’re an employee, either full or part-time.
The (possibly) good news: Ask your employer if you can be reimbursed for some expenses, if you haven’t already.
OK, so who can use a home office to decrease tax liability?
Independent contractors/sole proprietors – basically anyone who is self-employed. If your house (or a structure on your property) is your principal place of business and includes an area which is used exclusively for work, you may be able to deduct a portion of your costs.
Contrary to popular belief, your independent contractor/self-employed home office doesn’t need to be a guest bedroom or other room reserved exclusively for use as an office. However, the area (a corner with a desk, for example) does need to be used exclusively for work. (Exceptions are made for home daycare businesses, though.)
Wait, I heard employees can deduct their unreimbursed home office expenses if they exceed 2% of their adjusted gross income.
You could – before 2018. That year, tax reform eliminated that deduction. But before you despair, think about this: the increase in the standard deduction for all filing statuses is expected to make up for your loss.
Alright then. I’m self-employed — tell me what I can deduct?
First, you have to calculate the percentage of your home that’s used exclusively for business. For example, if you have a 2000-sq.ft. home, and 100 sq. ft is used for business, you can deduct 5% of your expenses. That means you can deduct 5% of your expenses for:
- Mortgage interest and insurance premiums
- Insurance
- Real estate taxes
- Casualty losses
- Security services
- Electricity
- Telephone
- Garbage removal
- Other business expenses (ask an accountant or tax lawyer)
I’ve heard taking home office deductions increases my chances of being audited. Is that true?
Perhaps, but not astronomically. A smart idea may be to consult an accountant or tax lawyer before doing anything. They will tell you what “areas” qualify as a home office. They’ll also tell you to keep meticulous records of your business income and business expenses, in case you are audited. But fear not: many people do take these home office deductions every year with no ill effects.
Questions? Those in the Los Angeles area can call The Law Offices of Robert T. Leonard at 818-485-2115