A report by Gallup indicates that the number of people working from home has jumped from 28% in April 2020 to almost 46% in September 2020, showing a rising trend. So how does this affect your taxes?
If you’re working from home as a W2 employee, unfortunately, you can’t take any deductions. However, for those reporting their business on Schedule C of their personal income tax return, usually sole proprietors or Single-Member LLCs, or gig economy workers – AKA someone who works on short-term contracts or freelance work as opposed to a permanent job – then there are a number of deductions you can claim. In this month’s blog, we walk you through some of the most common ones and how to calculate them.
Your Home Office
One of the first things you may be able to deduct is expenses related to your home office. A home office is a space in your house used regularly and exclusively for business purposes. So, for example, if your office is in a second bedroom which is regularly and exclusively used for business, then the room qualifies as a home office. If the room is also used as a spare bedroom when guests are visiting, or as a playroom for the kids, the room does not qualify as it fails to be exclusively used for business.
You will need to know the square footage of your home office space and the square footage of your home. This ratio will determine the percentage of various home expenses that can be claimed as a home office deduction. Once you have this information, there are two methods of claiming the deduction: the traditional method and the simplified method.
The traditional method takes various general household expenses such as property taxes, mortgage interest, and others and multiplies those amounts by the percentage calculated in the previous paragraph to determine the amount of the home office deduction. The simplified method home office deduction is calculated based on $5 per square foot of the home office, with a maximum of 300 square feet of home office space.
One difference between the traditional method and the simplified method is that under the traditional method when you sell your house with the home office at a gain, you will pay capital gain tax on the amount of gain up to the depreciation taken on the house. This does not apply to the simplified method.
Another difference between the traditional and simplified method is carry-over of expenses. While neither method will cause the net profit of the business to go below $0, the unused portion of the traditional method can be carried forward to future years, while the unused portion of the simplified method cannot be carried forward to future years.
Your Vehicle and Mileage
Another deduction you could make would be the use of your personal vehicle/mileage when used for business. It is important that you keep a detailed mileage log (or use a mileage app) to keep track of business miles and total miles for the year. You have two choices for claiming business mileage, either actual vehicle expenses, such as fuel, repairs, insurance, parking, tolls, and maintenance, or the Federal reimbursement rate which is 57.5 cents per mile in 2020. If you use your vehicle 50% or less for business, the only option is the Federal reimbursement rate. For actual expenses, it is important to only include the expenses related to the personal vehicle used for business purposes.
Another deduction you could make would be for business use of a personal cell phone. Similar to your vehicle, personal use of your cell phone cannot be deducted so you would need to separate this out for tax purposes. To determine your deduction, you would need to multiply your cell phone bill by the percentage it was used for your business. For example, if your phone was used for your business 50% of the time, then your total deduction would be 50% of your portion of the bill. How you determine that percentage needs to be tangible and generally consistent from year to year.
When it comes to other phone deductions, a standard rule of thumb is that the cost of landlines is not deductible. But if you have a second line, such as with a fax machine, you would be able to deduct that expense.
The internet is something that’s a necessity for anyone who works from home, which means you can deduct a portion or even all of it as an expense with your taxes. As with anything else, your internet expenses must be used for work purposes. For example, you must use your internet connection for business purposes in order to deduct a portion of the bill as a business expense. You will have to determine a reasonable percentage of business use and then you would multiply it times the internet service cost to determine the deduction allowed.
The final deduction we’re going to discuss in this post is general office supplies. These can include pens, paper, ink, folders, a desk… anything that would be used in the day-to-day running of the office. All of these that are used exclusively for business purposes can be deducted as a business expense.
When working from home, you may think that you can deduct the expense of ordering your meal that you eat at home. However, a regular meal on your lunch break in your home cannot be classed as a business expense. It can only be considered a deduction if you are traveling, usually staying out of town overnight. You can claim the actual expense of the meal, or the relevant per diem for the location of the work. You should keep track of both to determine which is most beneficial on a per-trip basis. If you plan to deduct actual meal expenses, make sure to keep your receipts, track actual costs, document the business purpose of each meal and, if necessary, list any other employees, customers, or vendors eating with you.
A Note on W2 Employees
As we briefly mentioned at the beginning of the blog, if you are an employee who is being made to work from home by your employer, you cannot deduct any expenses due to the Tax Cuts and Jobs Act of 2017. However, you may be able to get reimbursements from your employer. To find out, you would need to ask your employer directly.
As you have read, deductions are not always cut and dry. There are limitations, guidelines, and calculations that will help you determine what you can and can’t claim as a deduction. Therefore, it’s always a good idea to work with a tax and accounting professional for some peace of mind and to make sure you are doing everything by the book. If you’d like to reach out to our team, you can do so here.