Each year, including this year, 2021, the IRS offers a home office deduction which is available to self-employed individuals. People who work from home but are employed by a company and receive a W2 are not eligible. The Tax Cuts and Jobs Act did away with the deduction for unreimbursed employer expenses from 2018 to 2025 which would have allowed taxpayers to deduct expenses they incurred while working from home.
However even taxpayers who are W2 employees may still be able to receive a deduction for unreimbursed business expenses, including the home office deduction for 2021, on their state tax returns if they work from home. Certain states allow employees to deduct unreimbursed job expenses as itemized deductions. As long as those expenses as well as the other itemized deductions exceed the standard deduction for that state an employee can claim the deduction. These states include Alabama, Arkansas, California, Hawaii, Minnesota, New York, and Pennsylvania.
A taxpayer who is an employee of a company but also has a part time side business which they use a home office for can qualify for the deduction.
The deduction can be claimed only if an employee has an office or place of business in their home that they regularly and exclusively use to conduct business. This means the space must be used solely for business and cannot have other personal uses. Also, the space must be used consistently to qualify as regular use. There are no strict guidelines but typically a self-employed person must work in that home office space for at least a few hours each day for it to qualify.
Methods Available to Claim the Deduction
There are two methods for claiming the home office deduction in 2021. The regular method and the simplified method. With the regular method a self-employed person must determine the actual size of their home office compared to their whole home. The taxpayer must divide the square feet of their home office by the total square feet of their entire home to determine what percent their office is of their whole space. They can then deduct expenses related to their home office based at that percent.
On form 8829, Expenses For Business Use of Your Home, there are two sections for expenses that can be deducted. Indirect expenses such as utilities, mortgage or rent must be allocated between the home office area and the remainder of the home. For example, if the home office is 10 percent of the home, 10 percent of those expenses can be deducted. Direct expenses on the other hand are expenses related solely to the home office and can be 100 percent deducted. These include things like painting or repairs that are done only in the home office space. The deduction is still available if a person rents their home or has an apartment. There are special rules if the home is used as a daycare.
The simplified method allows a taxpayer to take $5 per square foot of their home office up to a total of 300 square feet. The maximum available deduction would be $1,500.
If you have questions regarding home office deductions, The Innovative CPA Group is readily available to assist. Please get in touch with us at 203-489-0612 or via our contact form.