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The home office deduction is a great tax break for the millions of Americans who are now working from home, either occasionally or full-time. But there's one huge catch ... you can't be an employee!
That's right, if you're working from home for an employer, you normally can't deduct your office expenses.
Here's a quick look at the basic requirements to be able to deduct your home office expenses, along with some suggestions for how to qualify for the deduction and turning your home office into a tax planning opportunity:
The basicsThere are two requirements for having a tax-deductible home office:
• Your home office is only used for business purposes. Your home office must be used exclusively for operating your business. It can't double as the family media center or living room. To meet this requirement, set up your office in a separate area of your house. Then if you get audited by the IRS, there is no doubt that your office is used exclusively for business purposes.
• Your home office is your primary place of business. You need to demonstrate that your home office is the primary place you conduct your business. The IRS has clarified that you can meet clients and conduct meetings at separate office locations, but your home office must be the only location where your administrative work is completed. So if you meet with clients or work on any part of your business away from your home office, keep a journal of each specific activity undertaken and describe how it doesn't violate the primary place-of-business rule.
Looking at these two criteria, everyone that is now required to work from home probably meets both qualifications.
Qualifying for the deduction
While it usually makes little sense to move from an employee to a contractor simply to get a home office deduction, too many ignore the move when it could be available to them. Here are some ideas.
• Become an independent contractor. The easiest way to deduct your home office expenses is by switching from being an employee to an independent contractor. With a number of firms cutting pay and benefits due to the pandemic, it may be worth exploring. If you can meet the IRS requirements for becoming an independent contractor, it may be worth doing the math by considering all the deductions your home office may make available to you and comparing them to the cost of lost benefits as an employee.
• Start a side business. If becoming an independent contractor for your current employer isn't an option, consider starting a side business. You can deduct all business-related expenses on your tax return, including your home office expenses. If you go this route, ensure your home office is in a different location in your home than your other work space.
• Consider your entire household. Even if you don't qualify for the home office deduction, maybe someone else living in your home does qualify. So look into your options to see if a family member can take advantage of the home office deduction.
Figuring out how to properly deduct your home office can be a lot more complicated than it appears. If you need help, please call.