Work from home tax deductions, why the fuss? According to Global Workplace Analytics, 25-30% of the workforce will be working from home numerous days a week by the end of 2021. Currently a pattern before the pandemic, remote working ended up being the “brand-new normal” for businesses of all sizes having a hard time surviving throughout safer-at-home regulations. Today, both companies and employees have actually discovered the positives that remote working offers. Nevertheless, only employers can claim work from home tax deductions on their income taxes.
Let’s review who can claim work from home tax deductions, what expenditures qualify, and how you must calculation those deductions.
Claiming Work From Home on Your Taxes
Prior to 2018, employees working from home could claim some unreimbursed expenses on their taxes. However, the Tax Cuts and Jobs Act removed those deductions for employees through 2025. Luckily for business owners, work from home tax deductions still look for business owners, whether you’re a sole proprietor or an LLC.
The secret is understanding how to stay on the right side of the law regarding home office use. And knowing what is tax-deductible for yourself and your company.
Qualifying for Home Office Expenses
In general, the Internal Revenue Service (IRS) considers expenditures connected to an office as deductible if the office is used exclusively for business regularly. Simply put, you must use a specific section or room of your home solely for performing business. It doesn’t have to be enclosed by a permanent partition such as a door, however, you can not utilize it for personal or family functions at any time.
There are 2 exceptions to this Exclusive Use rule:
- You do not need to satisfy the exclusive usage test if you use part of your home for keeping inventory or promotional products. But only if the storage space is utilized regularly for business purposes, and the area is suitable for storage.
- Part of the house is used for a registered daycare facility
Routine use is specified as one of the following situations:
- The home office is the principal place of business
- It is the office utilized as a place to meet patients, clients, or customers
- The home office is a separate, free-standing structure
Additional Rules
Additionally, the amount of time spent running the business and what activities are performed in the home office determine if you can claim work from home tax deductions.
For example, your office qualifies for tax deductions if you regularly carry out business administrative or management activities. Activities may include accounting tasks such as billing and recordkeeping, purchasing materials, and setting up appointments are essential functions when running a business. However, you can not claim home office tax deductions if these responsibilities are done primarily at another location, or you spread out these activities in between one or more offices.
Do you operate more than one business out of the same home office? That’s not an issue. Each business can take the home office deduction as long as it is the main business for that company.
Direct vs. Indirect Expenses
There are 2 types of deductible home office expenditures: direct and indirect.
- Direct expenditures consist of costs specifically attributable to the business’s home office, such as repair work and renovations made to the room.
- Indirect expenditures are those expenditures invested for the entire house, such as property owners’ insurance coverage, rent/mortgage payment, alarm, internet, and utilities. Indirect expenditures are based upon the percentage of your house used for business.
Did you begin your company mid-year? Then work from home tax deductions are only applicable to costs sustained after the business began operation.
Company Structure Considerations
Sole Proprietorships
Working from the house as a sole proprietor can save you a good deal of money usually spent on operating expenses such as utilities and office lease. You can claim work from home tax deductions by filling out IRS Form 8829 to report the percentage of your house utilized for business and your deductible expenses. Then use that number on your Schedule C, in addition to other allowed business expenses.
Partnerships
If your company is a partnership, you can subtract office expenditures on Form 1040, U.S.
Individual Income Tax Return. Normally, the expense is listed as an “unreimbursed partner expense” on Schedule E, Supplemental Income and Loss.
Limited Liability Company (LLC)
An LLC enjoys both the limited liability of a corporation and the less strict compliance requirements of a sole proprietorship. LLC company owners can also choose how they prefer to be taxed. A single-member LLC means there’s one owner. And they can take the office deduction on the individual tax return and Schedule C.
Members of a multi-member LLC can show non-reimbursed expenditures on Form 1065 K-1 or file taxes as an S Corporation or C Corporation and be treated as employees. That would make them ineligible for the office reduction and rather can get compensation for expenditures from the LLC.
C Corporations
In a C Corporation, all owners are employees, so they are not allowed to take work from home tax deductions. This also goes for LLCs electing to be taxed as a C Corporation.
Nevertheless, if a company is structured as a C Corporation, the corporation can reimburse its owners for office costs every month under an “accountable expense reimbursement plan.” Those compensations qualify as deductible business expenses for the business. And any business equipment bought for a remote employee.
Determining Your Deductions
The IRS permits two different ways to figure out your office deductions.
The first is called the Simplified Method and needs you to identify the office’s square footage and multiply that by $5/square foot. The maximum space permitted by the IRS is 300 square feet ($1,500).
The Detailed Method requires you to either calculate the area used for your business by dividing the office area by the house’s total area or divide the number of company use spaces by the total number of rooms in your home.
Speak with us to identify which method works best for your tax situation. Or, for matters concerning company structure, compliance, and filings give us a call at 509-543-7600 or send a request HERE.
October 2021
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