When the COVID pandemic hit, many employers set up their employees to work from home. Many of those same employers realized that by taking that action, they lowered their business expenses by minimizing or eliminating renting commercial office space. Consequently, those employees have continued to work from home. I frequently get asked about the rules for taking a home office deduction. I discuss this in more depth in my special topics section of this website. But here are some general observations.
Taxpayers who are self-employed and work from home can claim a very valuable deduction – the home office deduction. Unfortunately, employees who work from him cannot take this deduction on their federal return. The Tax Cuts and Jobs Act (TCJA) that went into effect for the 2018 tax year (and will not expire until the end of 2025 unless extended) eliminated unreimbursed employee business expenses for federal returns. The home office deduction for employees came under that definition. Some states, including California, did not conform with the federal law change, so employees may still qualify for the home office deduction on their state return if they itemize their expenses (instead of taking the standard deduction).
This deduction will help reduce self-employment income, which in turn reduces both taxable income (and the resulting income tax) and the 15.3% self-employment tax. It also triggers the deductibility of business mileage from your home office to your first appointment and from the last back to the home office. Generally, without a home office, those segments of your daily travel are deemed commuting expenses, which are never deductible.
You may have heard you cannot claim a home office deduction without business income. That is an oversimplified statement. While that statement is true for the current tax year, you can take the deduction in a subsequent tax year (as a carryover) and use it when your business makes a profit.
Here are several points to Consider
- Claim ALL business deductions even when you have no business income. Such deductions might create a net operating loss (NOL), which can be carried forward to offset future taxable income.
- Claim the home office deduction even with no business income. The home office expenses that are not allowed this year will carry over to future years in the separate home office carryover deduction category.
- Claiming a home office deduction can increase your mileage deduction. I mentioned this above. Trips from your home to the first business location and the return from your last business location are personal miles if you do not deduct your home office as your principal place of business. Establishing that “principal place of business” is easier than it sounds. Be sure to read the rules regarding home-office deductions in my “Special Topics” section!
This is important. You MUST file a tax return to receive the deduction benefit. If your only income is from self-employment, which is less than $400, you may not have to file a tax return for that year. Forget that rule. You need to file a tax return and list those expenses to claim the benefits above in a subsequent year.
Remember that you must substantiate your home office if you are audited. Ensure you have appropriate documentation that proves your home office is your principal place of business. Take pictures of your home office and keep those with your tax return information for the tax year. Here is why. You may move in a later tax period, and without evidence of your home office, you may lose the deduction in an audit.
Remember that your home office can provide significant tax advantages, even when your business income is low or non-existent. Ensure you position yourself to take full advantage of these benefits now and in the future.