One of the benefits of working from home is work from home tax deductions. You can claim home office tax deductions if you are eligible, and this, in turn, can help increase your profit.
The 2017 tax reform law put an end to tax deductions for people working from home. However, tax deduction is still on for individuals who qualify or meet the criteria.
In this post, we will tell you everything you need to know about working from home tax deductions, and how to qualify if you are not yet eligible.
Is There A Tax Deduction For Working From Home?
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Yes, there is a tax deduction for people working from home. The government presently recognizes work-from-home employees in only five different groups for tax deductions. These are:
- Performing artists: Work from home performing artists are eligible for tax deductions but they must have performed for at least 2 employers during the tax year.
Also, they must have had adjusted gross income for $16,000 or less before deductions can take place and incurred allowable expenses of 10% gross income from their artistic endeavors.
- Military reservists: US military reservists of the Coast Guard, Air Force, National Guard, Marines, Navy, Army, and even military reservists of public health services are eligible for tax deductions.
- State and local government officials: Irrespective of whether they are appointed or elected, they are eligible for tax deductions for home-based work expenses.
- Individuals with mental or physical disabilities: These disabilities reduce their ability to be employed, therefore, the government deduct expenses necessary for them to work from home and this includes their attendant care.
- Teachers: Teachers teaching any grade from kindergarten through 12th grade, can deduct qualified expenses from their taxes. These expenses include books, computers, software, supplies, and other expenses that are required for you to work from home.
Are Work From Home Expenses Tax Deductible?
Yes, work from home (WFH) expenses are tax deductible and it allows work-from-home employees or self-employed individuals to offset some of the business income with relevant expenses. These expenses are considered “necessary and ordinary” for your work.
The IRS states that an ordinary expense is any expense that is accepted and common in your industry. While a necessary expense is one that is appropriate and helpful for your business or trade.
An expense does not have to be obligatory before it can be considered necessary.
For instance, if you are a freelancer who earns $50,000 in a year based on what you bill your clients, but you spent $10,000 in expenses like home office supplies, advertising, the business use of a car, etc, you will only be taxed on $40,000, aside any other type of income you have. So, if you pay tax at a 20% rate, you will be paying 20% of $40,000 (that’s $8,000) instead of 20% of $50,000.
The $10,000 in the work from home (WFH) expenses reduced the total tax bill by $2,000 in this example we gave.
Is Rent Tax Deductible If You Work From Home?
Yes, this is called the “the home office deduction”. It allows you to write off expenses incurred for the business use of your home. Employees cannot claim this but self-employed individuals can.
However, you need to meet all the requirements to qualify for this.
This tax deduction covers expenses for using your home for business. This includes rent, insurance, mortgage interest, repairs, utilities, and depreciation.
It doesn’t matter the kind of home you have, you can also claim tax deduction if you work in an outbuilding on your property like the greenhouse, barn, studio, or unattached garage.
The key to getting eligible for this tax deduction is to use that particular area of your home for business only. By law, you are to use that area regularly and exclusively.
You can claim deduction if you use that area of your home only for business for that year. By doing this, you meet the “regular and exclusively” requirement.
The term “regular use” means that you use that area of your home for business on a regular basis. This means that the occasional or incidental use of a space in your home does not count and may disqualify you from being eligible for a home office tax deduction.
The term “exclusive use” means that you use that area of your home only for business or your trade. You don’t use it for any other purpose. You won’t be eligible for a home office tax deduction if you use that space for both business and personal purposes.
However, this exclusive requirement does not apply to you if you use part of your home for daycare facility or for the storage of inventory or product samples.
So, to qualify for home office tax deduction, you must use your home office space regularly and exclusively and you can also use the space:
- As your principal place of business
- To meet or deal with your clients, customers, or patients in the normal course of your business or trade.
- In connection with your business or trade if the structure is not attached to your home.
So, if you qualify for a home office tax deduction, there are 2 ways to calculate it.
There is the actual expense method in which you multiply the expenses of running business from your home by the percentage of your home dedicated to business use.
This means that if you worked from home for a part of the year, you only include the expenses incurred during that time.
Then, there is the simplified method in which you deduct $5 for every square foot of space used in your home for an office or for qualified business purposes.
Also, you can only claim deduction for the time you worked from home.
So, for instance, if your home-office is 300 square foot (This is the maximum size allowed for this method), and you worked from home 3 months in a year, your tax reduction will be ((300 X $5) X 0.25) = $375.
If you use part of your home for more than one business, you can file a separate Schedule C for each business. Don’t combine your deductions for each business on a single Schedule C.
If you use the actual expense method to calculate your home office tax deductions, then you need to complete Form 8829 and file it with the rest of your tax returns.
Is Work From Home Tax Deductible?
Yes, it is deductible but you have to be self-employed. Working from home as an employee may not be tax deductible if you are working for someone.
So, work from home is tax deductible but it is only for people who are self-employed, gig workers, and independent contractors. People who work from home for a company who gives them a W-2 tax season are exempted.
So, if you receive a paycheck from an employer, you are not eligible for this deduction even if you work from home.
List of Business Expenses That Are Tax Deductible
Below is a list of self-employed business expenses that are tax deductible.
Advertising
This includes the materials for marketing your business, like the flyers, ads, signage, trade shows, events, and branded promo items. It also involves the cost of developing these like the designer fee or agency cost.
However, note that this does not include office holiday parties, gifts, and other expenses that are not business-related.
Business insurance
The use of insurance is to protect your business from fire, theft, flood, malpractice, errors and omission, property, workers’ compensation, general liability, etc. These are tax deductible.
However, health insurance, auto insurance, and disability insurance are not tax deductible.
Car expenses
The business portion of your actual car expenses like gas, registration, insurance, repairs, and maintenance are tax deductible. If you don’t have a car yet, public transport expenses are tax deductible.
Depreciation
Depreciation expenses on business assets like furniture, cars, tools, office equipment, computers, etc. are tax deductible. You use Form 4562 to claim these deductions.
Car depreciation when using the standard mileage rate is not tax deductible.
Home office deduction
Expenses related to running a business in your home, like the rent of the business portion area, repairs, utilities, mortgage interest, insurance, etc. are tax deductible.
You need to fill Form 8829 to claim your deduction, but you don’t need to fill this form if you are using the simplified method.
Meals and entertainment
Meals or entertainment that you have with clients while discussing business or those incurred while you were traveling on a business trip are tax deductible.
However, meals for yourself and dues for athletic clubs are not tax deductible.
Office expenses
Office expenses like cleaning services, general office maintenance, etc. are tax deductible.
Supplies
Any supply that you use and replace for business purposes only are tax deductible. This includes office supplies like pens, markers, printer ink, bags if you do deliveries, and cleaning supplies.
However, office decorations are not tax deductible.
Travel
All travel costs related to business are tax deductible. This includes rental cars, airfare, lodging, and local transportation. This travel must be primarily for business, away from your residence, and the travel must be overnight.
Other expenses
Any other business expenses that are ordinary and necessary like education to improve your skills, association dues, banking fees, industry magazine, business gifts, etc. are tax deductible.
However, expenses that are not ordinary and necessary or expenses with their own separate category are not tax deductible.
Frequently Asked Questions (FAQs)
How can I claim my work from home tax deductions?
Tax deductions for expenses used to work from home are only available to people who itemize their deductions. And your work from home expenses can only be written off if it exceeds 2% of the adjustable gross income.
Note that you will be required to show your receipts and other important documents of deductible expenses. The deductible expenses are reported on Form 2106.
This IRS Form 2106 is attached to the main 1040 tax return. Also the work from home expenses are reported on Schedule A, which is the schedule for itemized deductions.
Does work from home tax deductions apply to self-employed people?
Yes, it does. So, if you are classified as an independent contractor instead of a regular employee, the above restrictions do not apply.
You can get a number of deductions as a self-employed individual that are not available to employees.
The work from home tax deductions you get include outlays for utilities and also insurance and depreciation of assets including real estate and computers.
However, it is complicated to determine if a self-employed individual or an independent contractor is an employee, so the IRS (Inland Revenue Service) makes the determination a case-by-case basis.
However, if you receive a W-2 statement, showing wages paid and taxes withheld, you are an employee. And if you get a 1099-Misc form instead which reports your earnings, you are an independent contractor and you will be able to claim work from home expenses.
If you are a regular employee who works from home, you can make your employer cover the cost. In this way, you will get help with the cost of working from home.
Who is eligible for work from home tax deductions?
Due to the Tax Cuts and Jobs Acts (TCJA) which came into effect during the 2018 tax year, some categories, like employees, are not eligible for a work from home (WFH) tax deductions even if they have significant expenses not reimbursed by their employer.
There are a few exceptions though, for instance, eligible educators can deduct up to $250 in any unreimbursed expenses.
So people who are eligible for the work from home tax deductions are:
- Freelancers: Even if you have a full time job and you freelance on the side, your freelance income would be taxed separately. The law regards freelance as a sole proprietor business and they can form business structures like the LLCs. As a freelancer, you would be required to file Schedule C and deduct expenses that apply to your freelance business.
- Gig workers: This includes independent contractors like delivery workers, rideshare, etc. They qualify to have their own business, so they can file Schedule C and deduct relevant expenses that apply to the business. This includes gas, insurance for the business use of a car, etc.
- Real estate landlords: If you make money renting out real estate, you will need to file Schedule E. In this case, you have an opportunity to deduct relevant expenses that apply to your business like cleaning fees, advertising, etc.
Does a home office qualify for tax deductions?
Yes, and this applies to business owners instead of employees. If you have a business you run from home, including a freelance business or small side hustle, you are eligible to deduct costs related to the portion of your home that you use regularly for business and that portion must be used exclusively for business.
There are special rules that apply to taxpayers who use part of their homes as a daycare facility, this rule allows for a deduction for the part of the home used even if that part is also used for other purposes that are non-business related.
Conclusion
Work from home (WFH) tax deductions help you save some money thereby increasing your profit.
This post explains everything you need to know about working from home tax deductions, how you can qualify, and how to calculate your deductions.
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