Home Office Deductions For Telecommuters

Working from home has become increasingly common, and with it, the ability to deduct home office expenses from your tax bill. However, this is not available to all employees. Since the 2018 tax reform, at-home expense deductions for employees have been reduced but remain for self-employed workers. Self-employed people can generally deduct office expenses whether or not they work from home. This covers office supplies, postage, computers, printers, and other equipment. The home office tax deduction also covers expenses for the business use of your home, including mortgage interest, rent, insurance, utilities, repairs, and depreciation.

Employees with a side business

If you are an employee with a side business, you may be able to take the home office deduction. However, it's important to note that this deduction is not available to employees who work from home for another company. The office or space where you conduct your separate self-employed business cannot be the same space where you work as an employee.

To qualify for the home office deduction, you must meet the following criteria:

• Exclusive and regular use: You must use a portion of your home exclusively and regularly for your business. This includes structures on your property, such as an unattached studio, barn, greenhouse, or garage. It's important to note that this space cannot be used for any other purpose besides your business.
• Principal place of business: Your home office must be either the primary location of your business or a place where you regularly meet with customers or clients.

There are two methods to calculate your home office deduction:

• Simplified method: With this method, you multiply the square footage of your space by a prescribed rate, which is currently $5 per square foot for up to 300 square feet of space.
• Actual expenses method: This method values your home office by measuring actual expenditures against your overall residence expenses. You can deduct mortgage interest, taxes, maintenance and repairs, insurance, utilities, and other expenses.

When deciding which method to use, consider which would result in a larger deduction for you. Additionally, keep in mind that you must be able to prove that your expenses are necessary for your business and meet specific requirements to claim home expenses as a deduction.

Self-employed people

Firstly, the space must be used exclusively for business. This means that if you work at your dining table, for example, you can't deduct this space, as it's also used for personal activities like eating. However, if you purchase a desk that is used solely for work, you can deduct this space.

Secondly, the space must be used regularly for business. This means that if you are self-employed for only part of the year, you can only deduct expenses for the months that you were self-employed.

Thirdly, the space must be your principal place of business, or a place where you meet regularly with clients. It doesn't have to be the only place where you do work, but administrative tasks must be conducted there.

There are two methods for calculating your home office deduction: the simplified method and the direct method.

The simplified method allows you to deduct $5 per square foot of your home office, up to 300 square feet, for a maximum of $1,500. This method saves time and simplifies record-keeping.

The direct method involves tracking all your home office expenses, including repairs and maintenance, as well as a portion of other expenses, such as rent or property taxes, based on the proportion of your home that is dedicated to your office. This method may result in a larger deduction but requires more work.

You can switch between the simplified and direct methods each year to get the biggest tax deduction.

In addition to home office expenses, self-employed people may also be able to deduct other expenses for setting up their home office, such as furniture, equipment, and dedicated phone or internet connections.

It's important to keep accurate records of any expenses you claim as a deduction, including receipts and proof of payment.

Armed Forces reservists

Travel and Business Expenses

If you are an Armed Forces reservist and travel more than 100 miles away from your home to perform reserve service (such as drills or meetings), travel-related expenses can be subtracted directly from the income reported on your tax return as an adjustment to income. You do not have to itemize deductions to take advantage of these benefits. Unlike most other employee business expenses, the deduction for these expenses is not subject to the standard 2% Adjusted Gross Income (AGI) limit. Allowable expenses include those that cover overnight transportation, meals, and lodging.

Military Differential Pay

Reservists called to active duty may receive military differential pay from their employer to represent the difference between their regular salary, prior to being called to active duty, and the amount being paid by the military. Military differential pay is voluntary by an employer and has special rules. For example, the pay is not considered wages and therefore is not subject to Social Security, Medicare, or income tax withholding. The income should be reported on Form 1099-MISC (Box 3) and on Form 1040 (Line 21) as "other income" when filing a tax return. Additionally, this pay will not qualify for the combat pay exclusion. Even though this income is not subject to any withholding, it is still considered taxable.

Tax Deferral Status

Another benefit for reservists called to active duty is that they may qualify for a deferral of taxes owed if you can show that your ability to pay taxes was affected by your military service. The deferral is not automatic; you will need to apply for it. When applying, you must show how your military service impacted your ability to pay. You must have received a notice of tax due, or have an instalment agreement with the IRS before applying for the deferral. The deferral does not extend deadlines for filing any tax returns.

Qualified performing artists

As a qualified performing artist, you may be able to deduct certain expenses from your taxes. Here is some information on what those expenses might include and how to go about claiming them.

• Supplies
• Insurance (other than health)
• Travel expenses
• Depreciation
• Car expenses
• Equipment rentals
• Mortgage interest
• Rent
• Utilities
• Real estate taxes
• Maintenance and repairs
• Internet connection
• Union and professional association fees
• Commissions paid to an agent
• Costs of training to maintain or improve skills

It is important to note that these expenses must be directly related to your work as a performing artist and cannot be attributable to personal use.

Qualifications for the Deduction

To be considered a Qualified Performing Artist and take advantage of these deductions, you must meet certain criteria:

• You must have worked as a performing artist in the capacity of an employee (not an independent contractor) for at least two employers, receiving wages of $200 or more from each.
• The amount of expenses attributed to your work as a performing artist must exceed 10% of your gross income from such services.
• Your adjusted gross income, excluding this deduction, must not exceed $16,000. If you are married, you must file jointly with your spouse unless you lived apart for the entire tax year, in which case the $16,000 limit applies to your combined AGI.

How to Claim the Deduction

When it comes to claiming the deduction, the IRS offers two methods: the Regular Method and the Simplified Method.

The Regular Method requires you to calculate your actual home office expenses and keep detailed records. You can use IRS form 8829 to calculate the deduction.

The Simplified Method reduces the burden of record-keeping by allowing you to multiply an IRS-prescribed rate by the allowable square footage of your home office instead of determining actual expenses. However, there are some limitations to this option:

• Standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet.
• You cannot deduct depreciation or take a business loss.
• Any amount over the gross income limitation cannot be carried over.

In conclusion, qualified performing artists can deduct a variety of expenses from their taxes, but it is important to carefully calculate and record these expenses to avoid issues with the IRS.

Fee-based state or local government officials

If you are a fee-based state or local government official, you may be eligible to take a home office deduction for unreimbursed employee expenses. However, it is important to note that the criteria for this have changed since the 2018 tax reform.

Firstly, you must be able to prove that your expenses are:

• Paid or incurred during the tax year.
• Necessary for carrying out your work.
• Ordinary and necessary.

Secondly, you must use your home office exclusively and regularly for your self-employment. If your home office is a separate structure from your home, it does not have to be your principal place of business. You can deduct a portion of your home-related expenses, such as mortgage interest, property taxes, homeowners insurance, and utilities.

Thirdly, you must keep accurate records of any expenses you claim as a deduction. The IRS recommends keeping a written record or logbook in case any questions arise about your deductions. You should also save proof of payment for any tax-related expenditures. This proof may be in the form of a credit card or bank statement, a cancelled cheque, or an itemized receipt. If you paid in cash, the receipt should include the name of the payee, the date of payment, and the amount. Digital records will usually be accepted as long as they can be retrieved when needed. Keep copies of all tax-related items and documents for at least three years.

Finally, you have two methods for calculating your business use of home tax deductions: the simplified method and the direct method. The simplified method allows you to expense $5 per square foot of your office, up to 300 square feet for a maximum of $1,500. The direct method is more involved but could result in a bigger deduction. It involves tracking all of your home office expenses, as well as any costs related to repairing and maintaining the space. You can also claim deductions for a portion of other expenses based on the proportion of your office space to the rest of your residence. You can switch between the two methods each year to get the biggest tax deduction.

Frequently asked questions