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February 2019 Tip of the Month

2018 Home Office Deduction or Not?


Boy, we can’t tell you how many people we speak to, even accountants, who just assume they don’t qualify or that it’s an audit red-flag. Well, Abo and Company is here to tell you it is often a viable approach to tax reduction.

First, if you operate a business, you may qualify for home office deductions.

However, if you are a W-2 employee, President Trump's 2017 Tax Cuts and Jobs Act (TCJA) effectively eliminated such deductions. Prior to the TCJA, if you met the primary requirements (we’ll discuss in a bit), you could qualify for deductions as a company employee if the home office was used for the “convenience” of your employer. Essentially, you had to establish that the home office was necessary for the business operation. However, as an employee, you could claim qualifying home office expenses as “miscellaneous itemized deductions” (albeit limited to the excess over 2% of your “Adjusted Gross Income”).

Alas, the TCJA eliminated all “miscellaneous itemized deductions” for 2018-2025. If you are an employee who incurs home office expenses out of your own funds, you now reap no tax benefit. Abo and Company’s suggestion? Ask your employer to consider restructuring your “compensation/reimbursement package” by reimbursing you for these home office expenses. In this fashion, you won’t be taxed on the reimbursements (which is the same as so deducting them before from your gross compensation), while the employer can deduct the reimbursements.

You are well advised to re-read and even give your employer a copy of Abo and Company’s email alert since you need to ensure an “accountable plan” is in place where you incur expenses while performing duties as an employee. Contact us for a copy or go to our website.

Here’s the lowdown on the home office deduction (self-employed or as an employee). To qualify, you have to use the office regularly and exclusively as (1) your principal place of business (i.e., the place where you conduct most of your income-earning activities or the place where you conduct all your administrative chores) or (2) a place where you meet with customers, clients or patients in the normal course of business. If you meet one standard, it entitles you to deduct direct expenses for your home office plus a proportionate share of indirect expenses like mortgage interest, property taxes, utilities, repairs and insurance. (mortgage interest is generally deductible anyway by itemizers, while a limited itemized deduction may be available for property taxes under TCJA). In addition, you can claim a depreciation deduction for the part of the home used as an office.

The IRS established a simplified safe-harbor method for calculating home office deductions. The safe-harbor method should reduce the administrative, recordkeeping, and compliance burdens of determining allowable home office deductions under the more complicated actual-expense method. This safe-harbor method allows an eligible taxpayer to claim a home office deduction of $5 per square foot of space used for qualified business use, limited to 300 square feet, with no questions asked about actual expenses and no required documentation of expenses. Therefore, the maximum annual safe-harbor allowance is limited to $1,500 ($5 x 300). 

Oh yes, we almost forgot to mention it may be possible to qualify for a home office deduction for a space where you don’t even perform any work. You can deduct the cost of an area used to store inventory or product samples for a self-employed business (even your garage). 

Another possible advantage of a qualified home office is that increased deductions for driving can be achieved. Specifically, if a home office qualifies as a principal place of business, all of your commuting from home to various temporary work locations (i.e. client or customer locations, your accountants at Abo and Company, Staples, FedEx, post office, etc.) counts as business mileage. The point is, when your home office qualifies as a principal place of business, it's usually easy to rack up lots of business mileage, which makes it easier to clear the over-50%-business-use hurdle and qualify for the generous first-year vehicle depreciation write-offs. A higher business-use percentage also means bigger (perhaps much bigger) annual vehicle depreciation deductions. The home-office deduction itself is icing on the cake. Without a bona-fide home office, driving from your home to your first place of business is considered commuting and the IRS considers commuting similar to non-deductible personal use of the auto. 

Also, if you meet the requirements, you can take the deduction for a side business. If your home office is also used for personal reasons, you’re out of luck. The more space you legitimately devote only to your business, the more your deduction will be worth.

As alluded to earlier, qualified home office expenses include direct expenses which are those you incur specifically for your home office (i.e. painting/wallpapering your home office, paying someone to clean it, carpeting it, etc.). Such direct expenses will be 100% deductible. Qualified indirect expenses include expenditures that benefit the entire home times the percentage which relates to the home office (i.e. allocable rent, mortgage interest and property taxes, depreciation, utilities, insurance, repairs and maintenance, snow removal, etc.)
Home office deductions are limited to the gross income from the business activity reduced by: (1) other expenses for which deductions are allowed absent business use (such as qualified residence interest, real estate taxes, and casualty losses) and (2) business deductions that are not allocable to using the home (such as advertising and supplies). Deductions disallowed under this business income limitation not otherwise allowed (such as interest and taxes) are carried forward to the following year and have the same business income limitation in that following year, whether or not the home is a residence during the carryover year.

Despite all the limitations and caveats discussed above, Abo and Company knows a great tax planning opportunity when we see one.