Millions of Americans are now working from home. Many of them never worked from home before. If you’re one of them, can you get a tax deduction for your home office expenses?
It depends.
Claiming a home office deduction for business owners
If you’re a self-employed business owner, you can claim a tax deduction if you work from a home office or other home workplace. Under the rules, it does not have to be a full-time business. It can be a side gig. However, your home office deduction can be no more than your profit from the business.
To qualify for this deduction, the area of your home (or apartment) must be used exclusively for your business. With this in mind, you don’t have to use an entire room or rooms.
If you’re using a workspace at home exclusively to run your business, you should have no problem taking this deduction.
No home office deduction if you’re an employee
You’re an employee for tax purposes if your employer classifies you as one. Your employer issues a W-2 form every year, reporting your wages and other compensation to the IRS.
The fact that you are temporarily working at home due to the pandemic does not change your employment status.
If you’re an employee, you can’t take the home office deduction. The deduction isn’t valid even if you have no choice but to work at home because your employer has closed its office or other workspaces due to the pandemic.
This rule seems grossly unfair. And the tax law wasn’t always this way. Before 2018, employees could take the home office deduction if they worked at home for the employer’s convenience.
Unfortunately, when Congress enacted the Tax Cuts and Jobs Act in 2018, it eliminated all deductions for employee job expenses from 2018 through 2025. Thereupon, the deduction for home offices was removed.
So, unless Congress changes this law, forget about deducting home office expenses on your tax return.
Employer reimbursement for home office expenses
However, there is an alternative to the home office deduction for workers. Instead of taking the deduction, employers can reimburse employees for their home office expenses.
If you satisfy the IRS rules, the reimbursement is tax-free too. And your employer can deduct the full amount as a business expense.
Why would your employer reimburse you for your home office? A few states may require it under state labor law. California, Pennsylvania, Illinois, Montana, Iowa and New Hampshire all require employers to reimburse their employees for necessary job expenses they pay themselves. These may include at least some home office expenses.
Even if reimbursement is not legally required, your employer might be willing to cover it anyway out of a sense of fairness or to help employee morale and productivity. However, in most states, an employer is under no obligation to make such reimbursements.
Requirements for tax-free home office reimbursement
Employers may pay tax-free reimbursements for many types of out-of-pocket expenses employees incur while on the job. One typical example is business mileage.
Employee home offices are also reimbursable as a tax-free employee fringe benefit if:
- You meet all the requirements for the home office deduction, and
- You get reimbursed under an accountable plan.
Here are the requirements:
You work at home for the employer’s convenience: First, you must work at home for the employer’s convenience, not because you want to. If you must work at home because your employer’s office is temporarily closed, this requirement is clearly satisfied.
You otherwise meet the home office deduction requirements: You must use a portion of your home regularly and exclusively as your employee office. As mentioned above, you don’t have to use an entire room.
It’s up to you to decide how big or how small your home office is. The bigger your home office, the larger the deduction and reimbursement.
Reimbursement under an accountable plan: Finally, your employer must reimburse you under what the IRS calls an “accountable plan.” You must:
- Make an “adequate accounting” of your expenses
- Timely submit expense reports and receipts to your employer, and
- Promptly return any payments that exceed what you spent on your expenses
If you fail to follow the rules, your employer has to treat any reimbursements you’re paid as employee wages subject to tax. Accordingly, the employer must include the amount as taxable wages on your W-2.
An accountable plan doesn’t have to be complicated. It doesn’t even have to be in writing. One method is to keep track of all your expenses, including receipts. Then complete IRS Form 8829 and give it to your employer.
This form is what business owners file with their tax returns to claim the home office deduction. It shows each element of the deduction and gives the total amount.
Your employer won’t file this form. It will keep it in its files to show you got reimbursed for the proper amount for your home office expenses.
How much is the home office deduction?
The amount of the home office deduction is the same whether you take it yourself as a self-employed business owner, or you get reimbursed for the expense by your employer, who then deducts it.
Direct expenses: Direct expenses are those incurred just for the home office. They are 100% deductible. They may include, for example, computers, monitors, printers, internet service, or other equipment.
Indirect expenses: Indirect expenses are those incurred to keep your whole house or apartment up and running. They are deductible according to the percentage of your home you use for your home office. For example, if you use 10% of your home for your office, you may deduct 10% of these expenses.
Indirect expenses include rent, home mortgage interest and taxes if you own your home, utilities, depreciation, and other costs of maintaining your home.
Example:
Jason is an employee who works for a Manhattan law firm. He must work at home for three months when his employer’s office closes on account of the pandemic.
During this time, he exclusively uses 10% of his apartment as his office. He also pays $1,000 for a computer he uses for work. He pays $3,000 in monthly rent and utilities. His total home office expenses are $1000 + (10% x $9,000) = $1,900.
His employer reimburses him for this amount. The reimbursement is tax-free for Jason and fully deductible by his employer.
