By Roy Ice
We are almost to the end of 2020 and I am praying we don’t go into overtime.
I think people are starting to go a little stir-crazy. For example,I have noticed “COVID-envy”working its way into conversations. People talk about so-and-so who got “The ‘Rona.” Yeah, they were in agony for two weeks, but hey, they’re done, right?! It’s like a rite of passage for 2020. As silly as that may be, the uninitiated majority will still be dealing with things like working from home well into 2021. That gives me an idea for another tax-saving opportunity. Grab your favorite (and hopefully cleanest) work-at-home sweat pants and let’s talk about that.
First off, if you are an employee (W-2 earner), you are out of luck. Thanks to the 2017 Tax Cuts and Jobs Act, unreimbursed expenses are no longer deductible for employees. This includes the home office you created while your corporate HQ shut down. I know, it’s not your fault you have been forced to remote-in to awkward Zoom meetings with home-schooled kids screaming in the background; but, unfortunately, the current tax law will force you to seek compensation from somebody besides Uncle Sam. These days, some employers are offering reimbursements to help cover costs of internet or cell phone use, etc. Fortunately, these payments are generally not taxable.
A lack of employee deductions allows us to narrow our home office discussion down to the skeleton-employed or those with side businesses. Hobbyists are not included (see my last article) since they do not enjoy the same treatment for ordinary and necessary deductions as a bona fide business.
When done correctly, a home office can generate valuable write-offs from your personal home that would not otherwise be deductible. To assess the working space, we can use IRC §280A as a guide. We first have to make sure that there is a space set aside and dedicated for business. This means that putting a filing cabinet and a calendar in your “man-cave” or “she-shed” to take the occasional work phone call won’t cut it. The “space” does not need to be a separate room or structure, but it must be used exclusively as a workstation or a place to meet or deal with customers.
Once you dedicate a space to a home office and effectively give up the personal enjoyment, you are entitled to deduct the common household expenses allocated to this space as a business deduction. For example, if your home office is 200 square feet of a 2,000-square-foot home, then you can reasonably deduct 10% of utilities, mortgage interest, insurance and other maintenance costs on your tax return using form 8829. But beware: real property used in business is subject to depreciation. That means you must write off a portion of your home over the “useful life” of the asset (the IRS generally advises 39 years).
Before you get too excited about writing off your home, remember every time that you take a depreciation deduction, you are reducing your basis. This means that if you plan to sell your home down the road, you might trigger capital gains. If you think you will just skip over that inconvenient paper work, I am sorry to tell you, the IRS will factor in any depreciation “allowed or allowable” — whether you deducted it or not.
If that seems a little too involved, you can always use the “simplified method” which allows you $5 per square foot for up to 300 square feet. So which method is right for you? That question is best answered after talking to your advisor. They can help you keep track of your deductions so that you can stay comfortable in your home office — just remember to change your PJs once in a while.