More employees than ever before are working from home due to the pandemic – does this make them eligible for a home office tax deduction? Probably not. Even though the dining room may have been transformed into a conference room, this deduction has many rules and recent tax law changes that may curtail wide use. Below, we present the details around the home office deduction and discuss eligibility.
Does my home qualify as an office?
In order to qualify for this deduction, the taxpayer must have a dedicated area of the home used exclusively for conducting business on a regular basis. The IRS defines home for the purposes of this deduction as a house, apartment, condominium, mobile home or boat, and also includes structures on the property like a detached garage, greenhouse, studio or barn. The home must serve as the taxpayer’s principal place of business. Overlap with other activities outside of business can disqualify a space.
Miscellaneous itemized deductions suspended through 2025
The Tax Cuts and Jobs Act of 2017 suspended the miscellaneous itemized deduction for tax years 2018 through 2025. This suspended category of deduction includes unreimbursed employee business expenses, including those associated with setting up and maintaining a home office. As a result, this deduction is not available to the vast majority of taxpayers through 2025, barring future legislative action.
So who can take the home office deduction?
Partners in a partnership may deduct home office expenses on their individual income tax return provided that the partnership agreement contains language that addresses reimbursement of such expenses and their deductibility. Be sure to review the language of the agreement for specific conditions.
Individuals reporting income on a Schedule C can deduct home office expenses provided they meet the deductibility requirements mentioned above. All other employees and S Corporation shareholders are not able to take the deduction, due to the tax reform provision addressed above.
Track and substantiate expenses
Eligible taxpayers interested in claiming the home office deduction should start tracking expenses now. Remember, any expenses already reimbursed are not eligible. Use Form 8829 to claim the deduction. Even if the deduction is not available to a taxpayer on the federal tax return, these expenses may be eligible for a deduction on state and local returns. Treatment varies by jurisdiction, so it may be worthwhile to research whether or not a specific state or locality permits a deduction.
Pennsylvania clarifies home office expense deduction
The Pennsylvania Department of Revenue (DOR) clarified on March 9, 2021 treatment of the home office deduction at the state level. Pennsylvania taxpayers may deduct expenses for their home offices during COVID-19, but there are longer-term tax consequences to consider.
DOR will consider any space claimed via the home office deduction as a business location indefinitely for state tax purposes. As a result, any utilities associated with the functioning of the home office will be subject to six percent state use tax (residential utilities are tax-exempt in PA). Therefore, taxpayers who claim the home office deduction must track their utility usage related to the home office space and pay use tax on it. Additionally, when the home is eventually sold, taxpayers may have tax due on the portion of the gain related to the home office space.
Your RKL advisor can help you weigh the benefit of claiming this deduction and help to properly calculate and report taxable utility costs associated with a home office.
Questions about your specific circumstances related to the home office deduction? Contact your RKL advisor or use the form below to reach out to our tax team.