The Home Office Deduction 2020 In Time Of COVID-19

One of the significant social side effects of the COVID-19 pandemic is a wave of people suddenly working from home. You may be wondering if you can now get a nice tax break under the Home Office Deduction. Does the CARES Act change any of the rules surrounding the home office deduction? Do I qualify for the Home Office Deduction? Is it worth trying to get a Home Office Deduction In 2020? Keep reading to find out what you need to know.

Home Office Deduction Under the Trump Tax Plan

If the 2016 election had gone another way, under the previous IRS provisions, millions of more people would be able to take the home office deduction in 2020. Sadly, this valuable tax break was severely limited in the TCJA, aka the Trump tax plan. The short version is that if you are a W-2 employee, you are no longer able to benefit from the home office deduction, even if you work from home full time. Currently, you need to have self-employment income to benefit from home office deduction.

Who Can Benefit from Home Office Deduction During the COVID-19 Lockdown?

If you are a small business owner or self-employed and work from home, you will likely be able to take advantage of the home office deduction in 2020. Keep reading to determine if your specific situation could qualify for this valuable tax deduction for the self-employed. You are most likely already paying a mortgage or rent, so you might as well take advantage of an additional tax deduction for some of your home expenses if you’re eligible. 

The home office deduction was misused in the past, which made it an audit red flag. In light of the coronavirus pandemic, the IRS will most likely have a difficult time making the argument that a large number of Americans weren’t working from home for part of 2020. That’s assuming you keep good records and actually qualify for the deduction. I must repeat, if you are a W-2 employee, you will not be eligible for the home office deduction thanks to the Trump tax plan.

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What Will Qualify for the Home Office Deduction in 2020?

Qualifications can be determined by referencing IRS Publication 587. Is a portion of your home used “exclusively and regularly” as your principal place of business? Do you have “a place where you meet or deal with patients, clients, or customers in the normal course” of your business? If you answered yes, then you most likely qualify for the home office deduction.

The “exclusive use” may vary slightly from business to business. A YouTuber filming on the living room couch, in front of the TV, will likely never qualify for the entire living room, but they may be able to deduct a portion of the room. But if he has a room used exclusively for filming, that couch might be where their principal place of business, perhaps the entire room, could be used to calculate the home office deduction.    

For the rest of us, ordinary business owners, we are probably working from a desk or table, even an extra bedroom.  I’ve spoken with a few people relegated to closets to take calls while avoiding the children being home school elsewhere in the house.

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Does My Home Office Need to Be a Separate Room?

According to the IRS, your home office needs to be a “room or separately identifiable space.” The good news is space doesn’t have to be marked off by a permanent division of some kind. Your office does not have to be a whole room. It could be a desk in the corner. To avoid confusion, your home office space should look like an office or workspace. It would be harder to claim your kitchen table as your home office compared to even a desk in the middle of the kitchen. 

What Is the Principal Place of Business for the Home Office Deduction?

You may have several locations for your business, or you may work from Starbucks

SBUX
in order to escape the kids every so often (under normal non-coronavirus circumstances). You may even have a coworking space to see clients. To receive the home office deduction, part of your home must be your principal place of business for that trade or business.

Is your home your principal place of business? Consider the relative importance of your various activities and where they are done. For your home office to pass the “principal place of business” test, you must use it exclusively for “administrative or management activities,” and you must not have any other location where you also conduct a substantial amount of “administrative or management activities,” according to the IRS.

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With more than 30 million Americans now on unemployment since the COVID-19 pandemic began, I expect to see a wave of new small businesses pop up in the next year. For those of us who are already running a small business, or earning income as self-employed, every penny counts. Make sure to take advantage of the home office deduction if you qualify. You will already be doing the bookkeeping for your business, figuring out your home office deduction should be a breeze, that is, once you’ve established that you are eligible.  Be proactive with your tax planning; it can be the difference between making ends meet and going out of business. Work with a trusted Financial Planner and tax preparer to help keep as much of your hard-earned money as possible.