It’s 2019, and the world of employment is fundamentally different than the world our parents lived in; it’s no longer a requirement that a worker bee go into a central office and work in a cubicle. In fact, remote work is becoming a major benefit that employers are offering in order to attract better talent for open positions – when you can search anywhere for the perfect employee, the employer no longer has to settle. On the flip side, this means more and more people invest in a home office, with the understanding that they can deduct those expenses. This article will briefly discuss the nuances of home office tax deductions.
Can I Take a Home Office Tax Deduction?
In years past, if you were a W-2 worker, who happened to work remotely, you could claim a tax deduction for expenses related to your home office; this is no longer the case. Unfortunately, the law has changed recently, and the deduction is not available for W-2 employees. There are ways to accomplish this goal notwithstanding the change in the laws.
First, you can request to have your work status changed to “independent contractor.” You should encourage your employer to look into whether or not you actually qualify as an “independent contractor” first however, since the California Supreme Court’s recently issued opinion in Dynamex Operations West, Inc. v. Superior Court makes it incredibly difficult for an individual to qualify as an independent contractor. Without getting into details, the Dynamex opinion adopted what is known as the “ABC test”, which creates the presumption that individuals are employees of people they perform work for; it is a very difficult burden to overcome. Further, an employer who willfully misclassifies an employee as an independent contractor can face significant penalties pursuant to Labor Code section 226.8
Alternatively, and far safer, you can ask your employer to create an “accountable plan.” In a nutshell, if you made $120,000.00 in 2017, and deducted $5,000 for your home office expenses, you would ask your employer to reduce your salary to $115,000 and provide you with a $5,000 reimbursement for necessary expenditures (e.g., your home office) pursuant to Labor Code 2802.
I am Self-Employed, How Do I Take the Home Office Deduction?
If you are an “independent contractor”, you have a right to deduct the expenses of your home office on your taxes, but that doesn’t mean it’s easy to do. In order to take the deduction properly, there must be an area of your home that has the “principal place of business” designation, which is used exclusively for work.
Thus, if your office has a pull-out couch that sometimes sees action as a guest room, your office is no longer an office for tax deduction purposes; even if you put in 60 hours a week from that room. However, this does not mean you can never claim the home office deduction if a room doubles as a guest room, just make clear delineations of where the “guest” portion of the room ends, and the “office” portion of the room begins.
Once you have made sure that your home office meets the requirements, the IRS offers two methods for calculating the proper amount your deduction should be; one is simple, the other is not.
Keeping It Simple: Calculate how many square feet your qualifying home office space takes up and multiply that by $5 (to a maximum of $1,500). That’s pretty simple right?
Keeping it Not-So-Simple: First, calculate all the costs associated with you home (e.g., utilities, repairs, insurance, maintenance, etc.,) and adjust based on depreciation. The next step is to figure out what percentage of your house is comprised by your qualifying home office space and deduct that percentage of the total cost of your house.
If I Take the Deduction, Am I Just Asking to be Audited?
Not in the least bit, the reason the IRS created the simple method (discussed above) is to make it less frightening for people to take the deduction, not to scare them into avoiding it like the plague. As noted above, this deduction is becoming increasingly common in a world that has begun to embrace virtual workers.
At the Chernov Team, we take pride in understanding all things real-estate. In an evolving economy, there is naturally a contemporaneous evolution in employment; that evolution is trending towards remote work. The more money you save on taxes, the more money you will have available to purchase a home – which could mean an office upgrade and a housing upgrade. At the Chernov Team we understand that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.