Millions of people made home their primary workspace in 2020, as the pandemic raged and companies shut their offices indefinitely. But workers who have been relegated to doing business from dining room tables, basements, or attics shouldn’t count on getting a break when they file their tax return.
The federal income tax code has long included a home office deduction, but tax experts say few people will be able to claim it for 2020 without attracting the scrutiny of the Internal Revenue Service.
“I don’t see, frankly, in my practice, a lot of folks taking the home office deduction,” said Stephen E. Bonder, tax principal at CliftonLarsonAllen in Newton. “It’s an interesting thing to talk about, but it’s one of those squishy deductions where it’s hard to prove.”
There has long been speculation that the home office deduction increases risk of an audit. Bonder said that hasn’t played out in his own experience, but that when audits do happen, the IRS will closely examine how the deduction was calculated.
Most taxpayers aren’t even eligible for the deduction, thanks to the tax code overhaul pushed for by former president Donald Trump, which took effect in 2018. If all of your income came from working for someone else, you’re out of luck when it comes to subtracting home office expenses from taxable income. The deduction is solely for business income, not personal income. (Bonder said Massachusetts tax law mirrors federal rules on this subject.)
That means only self-employed people can take advantage of it. That includes people who work full-time on their own, as part of certain partnerships, and some who have side gigs as freelancers. But even self-employed people who began working remotely solely because of the pandemic could have a hard time making the case that their home office qualifies.
For instance, an attorney with an individual practice may have met with clients and conducted other business at an outside office before COVID-19, but switched to doing video conferences at home in mid-March. If she renewed her office lease with the hopes of one day resuming business meetings there, her home office may not be deductible.
For tax purposes, the IRS says a home office has to be a distinct part of the taxpayer’s home, and cannot be used for any other purpose. (There are some exceptions for licensed home day care facilities.) It also has to be the filer’s principal place of business. Bonder said the tax benefit is not intended to apply to a temporary arrangement.
The deduction is calculated either at $5 per square foot of business space, up to 300 square feet, or through deducting the cost of maintaining that space. That could include a portion of such household costs as insurance, rent, and repairs, based on the percentage of a home’s total floor space that the office takes up.
The IRS does allow self-employed people to deduct partial expenses for a home office space they used for part of a year. But even self-employed people who closed their offices and worked from home simply as a result of the pandemic may find it difficult to convince the IRS that home has become their primary place of business.
“You’d have to prove your intent,” said Michael F. Corrente, Boston-based managing director with the accounting firm CBIZ & MHM. “Is your intent to go back to your office when you can, or is your intent to use this office as your regular place of business going forward?”
Bonder said there are rare examples of people for whom the pandemic might have created a situation that qualifies for the deduction, such as a self-employed person who started a new venture from home after losing a job during last year’s economic disruption.
But for people who have decided to make their work-from-home status permanent as a result of the pandemic, they should be able to confidently claim the home office deduction ― when they file their 2021 return next year.