Qualifying for Home Office Deduction in Current TimesBy Jennifer Prendamano | Laura E. LaForgia | July 28, 2021
During the COVID-19 pandemic, many people spent at least some time working from home. First the bad news: there is no longer any federal home office deduction allowed for an employee. In the past, employees may have lumped unreimbursed home office deductions with their miscellaneous 2% deductions if these expenses were incurred for the convenience of the employer. Since the Tax Cuts and Jobs Act (TCJA) of 2017 suspended 2% miscellaneous deductions through 2025, there is no way for an employee to deduct unreimbursed business expenses, including home office deductions, on the federal tax return. State law varies and will be discussed later in this article.
The good news is self-employed people, those who are Schedule C taxpayers or partners, can deduct their home office expenses from their business income if their office qualifies. These include people who run their businesses from home or perform certain functions there, people who work from home for a second side job, and even people who have had their self-employed business only a few months.
In general, you qualify for the home office deduction if part of your home is used "regularly and exclusively" for the conduct of business. Your home office does not need to be a separate room, but it must be an area of your home where you do not do anything else.
Could you qualify your bedroom where you sleep as a home office? No.
Could the corner of the bedroom where you set up a desk and printer qualify? Yes.
Could it be a dedicated area in a vacation home? Yes. The home need not be your principal residence.
Work performed in a hotel room or a car will not disqualify you from meeting the principal place of business test.
If you pass the “regularly and exclusively” test but your home location is not your principal place of business, meaning business is conducted outside your home, you may still qualify if at least one of these factors applies:
You physically meet with patients, clients, or customers there.
You use a storage area or other free-standing structure exclusively and regularly for business. Examples of this are a greenhouse for a florist or barn for a horse trainer.
You use it exclusively for "administrative and management activities." Note the IRS says for this to work you may not have any other location where you also conduct a substantial amount of administrative and management activities.
Examples of administrative and management activities (A & M work) include scheduling, billing, bookkeeping, filing, marketing and recordkeeping. Professions that work outside the home but may perform A & M work at home include electricians, plumbers and traveling salespeople.
Suppose you have two home offices: one in your main home and one in your vacation home. Do both qualify as home office deductions? Yes, it is possible to have two home offices if each home office passes the tests independently of the other. Note that you would have to complete a separate IRS Form 8829 for each home office.
There are two methods allowed for computing expenses: the simplified option, which is based on square footage and maxes out at $1,500, and the regular method, which utilizes actual expenses to come up with the home office deduction. This is comprised of indirect expenses, direct expenses and an allocable share of depreciation for the structure, in addition to depreciation of business equipment.
Indirect expenses include the business share of such items as mortgage interest, rent, real estate taxes, utilities, general repairs and homeowner’s insurance. Direct expenses are related to the area used for business such as costs for painting, carpeting, cleaning and maintenance.
If you sell your home that contains a home office, there may be tax implications resulting from the depreciation on the house taken over the years. Please discuss with your tax advisor prior to putting your home on the market so planning can be done.
Keep a spreadsheet of your home office expenses and record the receipts in real time. Make a notation on the receipt as to what category it falls into. This saves time as opposed to going through a box of receipts once a year, many of which have already faded.
State Tax Considerations
Can employees deduct their home office expenses during telework on their state income tax return?
Although for federal purposes an employee is not entitled to take a home office deduction on their income tax return, they may be able to take a home office deduction on their state income tax return.
Beginning with the 2018 tax year, New York tax Law allows you to itemize your deductions for New York state income tax purposes whether or not you itemized your deductions on your federal income tax return. Generally, your New York itemized deductions are computed using the federal rules as they existed prior to the changes made by the TCJA.
Therefore, taxpayers – including W2 employees of companies – may be able to deduct home office expenses on their New York income tax returns even though the home office expenses will not be deductible for federal purposes for employees.
New York state itemized deductions are reported on Form IT-196, New York Resident, Nonresident, and Part-Year Resident Itemized Deductions.
Since Connecticut does not allow itemized deductions for personal income tax purposes, employees who are working from home in Connecticut will not be able to deduct their Connecticut home office expenses on their Connecticut income tax returns.
New Jersey does not allow for any employee business deductions on the New Jersey income tax return. Therefore, employees telecommuting and working from home in New Jersey would not be able to take a deduction for home office expenses on their New Jersey income tax returns.
Generally, Pennsylvania tax law permits a taxpayer to claim certain unreimbursed employee business expenses, including a deduction for home office expenses, on their Pennsylvania income tax return. Pennsylvania has recently issued guidance regarding whether the deduction for home office expenses is allowable for employees who are temporarily working from home during the COVID-19 pandemic. For purposes of Pennsylvania personal income tax, home office expenses are deductible if they meet the following criteria:
A taxpayer may claim a deduction for home office expenses if his/her employer does not provide a suitable work area OR the taxpayer is not permitted to report to his/her normal employer provided work area due to the COVID-19 pandemic.
A taxpayer must answer YES to all three of the following questions to qualify for a home office deduction on the Pennsylvania income tax return
a. Does your employer require you, as a condition of employment, to maintain a suitable work area away from the employer's premises?
b. Is the home office or work area the principal place where you perform the duties of your employment?
c. Do you use the home office or work area regularly to perform the duties of your employment?
If the answer to any of the three questions set forth above is NO, a taxpayer may not claim home office expenses on the Pennsylvania income tax return.
There must be exclusive use of the area for which the home office deduction expense is claimed. Accordingly, the area cannot be used for any other personal use during the time the home office expense is claimed.
To report the home office deduction, taxpayers must complete Form PA-40 Schedule UE.
Claiming the home office deduction on the Pennsylvania income tax return may have certain consequences that a taxpayer may not be aware of but should consider:
The taxpayer must gather and retain the expense information to claim the deduction (taxes, utilities, insurance, mortgage interest, maintenance, etc.).
The taxpayer must file and pay the 6% use tax on the utility expenses claimed as part of the home office deduction. (There is an additional 1% local tax if you live in Allegheny County; there is an additional 2% local tax if you live in Philadelphia.)
Once a property is used for business, it retains that status indefinitely and gains on the business use must be reported. If a taxpayer decides to take a home office deduction on the Pennsylvania income tax return, they will be required to pay Pennsylvania income tax on the gain from the sale of the home on the portion of the home that has been claimed as a home office.
For example, assume you claim that 20% of your home was used for a home office. When you sell your home, your overall gain on the sale of the home is $300,000. You would be required to pay Pennsylvania income tax on 20% of the gain ($60,000). This may deter certain taxpayers from claiming the home office deduction on their Pennsylvania income tax return.
As policymakers respond to the changing work landscape, with more Americans working remotely on a permanent basis, state tax laws and federal law related to the home office deduction may change. We will keep you informed. In the meantime, if you have questions about your eligibility for tax incentives related to remote work, please contact your Marks Paneth advisor.
About Jennifer Prendamano
Jennifer Prendamano, JD, is a Director in the Tax Services Group at Marks Paneth LLP. To this role, she brings nearly 20 years’ experience in tax controversy matters at the Federal and state and local levels as well as strategic state tax planning and consulting. Ms. Prendamano routinely handles complex state and local tax issues for large, multi-state corporations as well as high net worth individuals, and specializes in IRS examinations, state and local income... READ MORE +
About Laura E. LaForgia
Laura E. LaForgia, CPA, MST, AEP®, is a Partner at Marks Paneth LLP and a member of the firm's Private Client Services Group. Specializing in complex tax issues for high-net worth individuals and their families, Ms. LaForgia helps her clients manage, preserve and transfer their wealth through strategic income tax planning and compliance, trusts and estate planning, business management solutions and financial planning. Ms. LaForgia also provides guidance on matters related to gift tax, multi-state... READ MORE +