The coronavirus outbreak has pushed back 2019 tax filing in the U.S. three months to July 15. The pandemic may also impact your 2020 filing as well, specifically if you have started working remotely.
The ability to work remotely is nothing new for so-called “knowledge workers”—IT managers, data analysts, software engineers, and digital creatives of all varieties—who produce and conduct business primarily in front of a computer. Somewhat surprisingly, according to the 2019 Employee Benefits Survey by the federal Bureau of Labor Statistics, only 7% of the workforce enjoys a “flexible workplace” benefit, even though it is an often-cited work perk that attracts top talent.
The work from home narrative has changed dramatically as social distancing mandates forced offices and non-essential workplaces to close. Many businesses have suddenly welcomed a work from home culture in order to stay in business. It has companies and employees alike wondering how the IRS home office deduction will be treated in tax year 2020 filings.
If you are one of the many knowledge workers finding yourself working from home due to COVID-19, you might be wondering, will I qualify for the home office deduction in my 2020 returns?
The short answer? It depends—but probably not. However, that all can change before Tax Day 2021.
The IRS provide that if you use part of your home for business, you may be able to deduct expenses for the business use of your home. Both homeowners and renters are eligible, and all types of homes apply.
If your home office meets certain requirements that we discuss below, the simple IRS guideline is that you may claim a standard deduction of $5 per square foot of home used for business up to a maximum of 300 square feet.
Or, alternatively, you could claim your home office as a percentage or your home. Say you have a 200 square foot office in a 2,000 square foot home. The office is 10 percent of your house, and thus you can deduct 10 percent of your home-related expenses. That may include rent, mortgage interest, insurance, repairs, electricity and heating costs, bills from your internet service provider, and other items.
If you want to dive deep, all of this is outlined in IRS Publication 587 – Business Use of Your Home.
The IRS has two basic requirements that a home office must meet to qualify for the deduction.
Here is the kicker for anyone who just started working from home during COVID-19. Your status of employment is critical to whether you qualify for a home office deduction.
If you are a contractor that reports income using one or several Form 1099s, then you likely already know all about the home office deduction. Self-employed contract workers report any qualifying deductions using federal Form 8829, Expenses for Business Use of Your Home, which is filed along with your Schedule C (Form 1040), Profit or Loss from a Business.
For regular employees, home office deductions have become largely unavailable in recent years. Before the 2017 Tax Cuts And Jobs Act (TCJA), regular employees could deduct home office expenses as a miscellaneous itemized deduction on line 21 if Schedule A. That is no longer the case and is scheduled to stay this way through tax year 2025.
However, a home office deduction for 2020 is not completely off the table for regular employees, but the qualifications for a home deduction are much more robust compared to those of a self-employed contractor.
The rules for regular employees are outlined in IRS Publication 529 – Miscellaneous Deductions, and they for the most part resemble requirements for contractors: the space is used regularly and exclusively for work, and the majority of the business is conducted from that space.
Regular employees have another hoop to jump through to qualify for the deduction: employees must prove the home office is used for the convenience of the employer.
Before the pandemic, many people that worked from home did so because their employer offered WFH as a perk. In this sense, the home office is for the convenience of the worker, not the employer. Under the TCJA, this disqualifies the home setup for a tax deduction.
What does this mean for professionals who shifted to home setups during mandated stay at home requirements? We don’t know yet for sure, but as it stands, tax professionals agree that work from home setups will not qualify for a deduction—that is, unless new legislation comes about.
New legislation is not out of the question. According to Elizabeth Pascal, a tax attorney at Hodgson Russ, legal analysis and tax professionals are watching closely as the situation unfolds. The longer the stay-at-home orders go on, the more necessary it will be to get official guidance from states or Congress about how to address related tax issues.
If you are still working while sheltering in place, maybe hold off on that new PC or gaming chair if you are anticipating those items to be tax write off next year. But like anything related to this pandemic, the situation is fluid and things can change by April 15, 2021.