The real estate market is hot, and home prices are skyrocketing, rents are too darn high, inflation is even hitting your utilities like gas, electric, internet and streaming services. For those of us who have been working from home for the past two years, you may be wondering if you can get a bigger tax break from all these increased expenses? Some of you may be eligible for the Home Office Deduction, while others may be out of luck. Keep reading to find out if you can lower your 2021 taxes with the often-valuable Home Office Tax Deduction.
The Trump Tax Plan Severely Limited the Home Office Deduction
Before the implementation of the Tax Cuts and Jobs Act (TCJA), aka the Trump Tax Plan, millions more Americans were eligible for the tax benefits of the Home Office Deduction. Sadly, for your pocketbook, the home office deduction was eliminated for those of you working as W-2 employees. Even if you work from home 100% of the time, you are not eligible for a tax deduction for your home office expenses. As it stands now, you must have self-employment income to be able to take the Home Office Tax Deduction.
Who Can Take the Home Office Deduction for Tax Year 2021?
You can likely benefit from the home office deduction if you are a business owner or have self-employment income and work from home. The home office deduction can be valuable because it is based on expenses you would likely already be paying. Think mortgage, property taxes, utilities and even home maintenance.
The Home Office Deduction has a reputation for being an audit red flag. However, assuming you are eligible and have kept good records, you should take advantage of the tax-saving from the home office deduction. Again, I must shout, if you are a W-2 employee, you will not be eligible for the home office deduction thanks to the tax plan from former president Trump.
What Qualifies for the Home Office Deduction in 2021?
Qualifications for the home office deduction can be determined by referencing IRS Publication 587. Is a portion of your home used “exclusively and regularly” as your principal place of business? Do you have “a place where you meet or deal with clients, take Zoom calls, see patients, or customers in the normal course” of your business? If you answered yes, you most likely qualify for the home office deduction.
What “exclusive use” entails may vary slightly from business owner to business owner. A YouTuber making content on the living room couch in front of the TV will likely never qualify to deduct the cost associated with the entire living room, but they may be able to deduct a portion of the room. However, if they have a room used exclusively for filming, that couch might be the principal place of business; perhaps the entire room could be used to calculate the home office deduction.
Especially during the past two years during COVID, many of you have likely spent some time working from a desk or table or even commandeering a guest bedroom as your new home office. I’ve even spoken with people who’ve been stuck working in closets or hallways. Some of this is to get some distance between two parents working from home while kids are taught at home.
Does My Home Office Need to Be an Entire Room?
According to the IRS, your home office needs to be a “room or separately identifiable space.” The good news here is that your home office space doesn’t have to be marked off by a permanent division of some kind. Your office does not have to be an entire room. It could be a desk in the corner. That being said, your home office setup should resemble an office or workspace. This will vary from business to business. You might expect a different setup for the office of a painter versus the office of a CPA.
How To Determine Your Principal Place of Business for the Home Office Deduction
Many small business owners work across several locations. This could be a WeWork, Starbucks, airplane, home office combination. To get a tax deduction for your home office, part of your home must be your principal place of business for that specific trade or business.
How do you determine if your home office is your principal place of business? Consider the relative importance of your various business activities and where they are completed. For your home office to pass the “principal place of business” test, you must use it exclusively for “administrative or management activities,” and you must not have any other location where you also conduct a substantial amount of “administrative or management activities,” according to the IRS.
There has been a wave of new small businesses popping up during the COVID pandemic. The 2021 tax year may be the first time you flirt with taking the home office deduction. For others, you may have been running your business for years but, for some reason, have never taken the home office deduction.
Make sure to take advantage of the tax savings from the home office deduction if your business qualifies. Assuming you have kept up with your bookkeeping through the year, figuring out your home office deduction should be a breeze, that is, once you’ve established that you are eligible. Be proactive with your tax planning; it can be the difference between making ends meet and going out of business. Work with a trusted financial planner and tax preparer to help keep as much of your hard-earned money as possible.