The Home Office Deduction for Telecommuting Employees
If you are one of a growing number of employees who telecommute, you may be eligible to deduct some of your home office expenses. But strict rules apply.
Which Home Offices Qualify?
For the expenses to be deductible, your home office must satisfy three tests.
Test #1. The office must serve the convenience of your employer. You may be able to satisfy this test if your employer requires you to have a home office and to work there, if the home office is necessary for the operation of your employer’s business, or if the home office allows you to perform your work duties properly. You will not be able to satisfy this test if the home office is for your own convenience.
Test #2. The second test relates to how you use the space and its type. You can satisfy the second test in one of three ways.
Principal Place of Business — The home office is the principal place of business for your work as an employee. You may be able to meet the principal place of business requirement if the most important part of your work is done in the home office and you spend most of your work time there.
Separate Structure — The office is an unattached structure on the same property as your home.
Place To Meet Clients — You use the office space as a place to meet with patients, clients, or customers of your employer. Physical presence is required, so making telephone calls to patients, clients, or customers does not qualify. And the face-to-face meetings must be on a regular, not an occasional, basis.
Test #3. Additionally, the home office must be used exclusively and regularly as your home office. This can be a difficult hurdle. For example, the rule requires that your home office be used asonly your home office. If your children also use the area to play in, or if overnight guests occasionally sleep there, your home office will not satisfy the test. However, the area doesn’t need to be a separate room — it may be a portion of a room, provided it otherwise meets the relevant tests.
Calculating the Deduction
The amount of your home office expenses may be calculated using either the “actual expense” or the “simplified” method. The actual expense method involves dividing various expenses of operating your entire home between personal and business use and adding in expenses that pertain only to your home office. (An income limitation applies.) The simplified method — which the IRS began allowing in 2013 — entails taking the square footage of the home office (up to 300 square feet) and multiplying it by $5. Which method is better for you depends on your particular situation.
An employee’s unreimbursed home office expenses are taken as an itemized “miscellaneous expense” deduction. As a result, they are deductible only to the extent that they, when combined with other unreimbursed employee expenses and miscellaneous expenses, exceed 2% of your adjusted gross income. You must itemize to claim the deduction.
Contact us if we can help with questions about deducting your home office expenses. We’d be happy to review the rules with you in more detail and help you determine whether the deduction is available to you.