Over the past few years, countless workers began working from home – either fully remote or in a hybrid fashion. In the past, workers deducted their home offices and related expenses. Do you qualify? Not all workers do, so let us dive in below.
W-2 Employee
If you are an employee and work from home, you do not qualify for a home office deduction on your federal tax return. This deduction falls under unreimbursed employee business expenses as part of the 2% miscellaneous itemized deductions. This was eliminated at the federal level through the passage of the Tax Cuts and Jobs Act (TCJA) for tax years 2018 – 2025. Fortunately, certain states like California continue to allow home office deductions for employees. Check with your applicable home state for deductibility.
Employers
Employers can support their employees in other ways. By having a written accountable plan and reimbursing employees for their expenses, they can enjoy a win-win situation. The employer can deduct such expenses on their federal business tax return, and the employees do not include the reimbursement in their taxable income. However, if they do not have an accountable plan, then the employer can simply reimburse their employees’ expenses with a set amount every month. The employer deducts such expenses on their federal business tax return, but the employee must include the reimbursement amount in their individual taxable income.
Independent Contractor/Self-Employed
If you are an independent contractor or sole proprietor, you can deduct your home office deductions directly on Schedule C by using Form 8829 to calculate your allowable expense. For more information, you can review the 8829 instructions here.
Owner of an S-Corporation
Since S-corporation owners are considered employees, home office deductions are disallowed. As an employee, such expenses are considered part of the 2% miscellaneous deductions that were disallowed by the TCJA from 2018-2025 as discussed above. However, the S-corporation can adopt an accountable plan as discussed in the employer section above, but the plan must be inclusive of all employees.
Partners in a Partnership/LLC
Partners of a partnership, on the contrary, are allowed to deduct their home office expenses against their partnership income with work performed for the partnership directly onto Schedule E page 2. To do this, the partnership agreement should indicate that the partner’s home office expenses will not be reimbursed by the partnership. Such expenses are deductible against the federal income tax and self-employment tax as unreimbursed partnership expenses. To figure your deduction for business use of your home, please find the worksheet here.
What expenses qualify?
If you do qualify to take a home office deduction, the area used must be for exclusive and regular use. It must be the principal place of business for administrative or management activities and you have no other fixed location where you conduct such activities.
Your home office deduction is determined by taking the square feet of the dedicated office space over the total square feet of your home. That percentage is then applied to all home expenses including mortgage interest or rent, property taxes, utilities (electricity, gas, water, garbage, internet, cable, etc.), insurance, repairs and maintenance, and other household expenses like a gardener or house cleaner. You can view related forms and publications regarding home office deductions here. Furthermore, your accountant can further discuss the deductibility of other household expenses as well.
Additionally, you would depreciate your home and apply the home office percentage to determine the deductible depreciation amount.
If that record keeping is too much, you can use the simplified method which multiplies your home office square footage by $5 (up to 300 sq ft).
What if you sell your home?
If you sell your home, depreciation recapture applies if you deducted through the regular method of deducting actual expenses even if you did not claim a depreciation deduction. If you used the simplified method ($5 per square foot up to a max of 300 square feet), then recapture does not apply.
For additional guidance or to discuss your unique situation, please contact a member of our team.
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with start-up/emerging growth companies and affluent individuals. Building connections beyond the code.