8753 / When is a taxpayer entitled to deduct expenses incurred in maintaining a home office?

Editor's Note: The 2020 CARES Act did not change the rules governing the home office deduction. While more employees are working from home in the wake of the coronavirus pandemic, the business expense deduction for home office expenses of employees remains suspended under the 2017 tax reform legislation's suspension of all miscellaneous itemized deductions. Only self-employed taxpayers are entitled to the existing home office deduction.

A taxpayer is only entitled to deduct expenses for a home office if the taxpayer is able to meet the restrictive requirements imposed by the IRC and the courts with regard to this business deduction. A deduction for use of a part of the taxpayer's residence as an office will not be allowed unless a portion of the dwelling is used exclusively and on a regular basis as (a) the principal place of business for any trade or business of the taxpayer; or (b) the place of business used by the taxpayer for meeting patients, clients or customers in the normal course of the taxpayer's business.¹ If the taxpayer uses a separate structure as a home office, the use requirements are less restrictive and the use must only be "in connection with" the taxpayer's trade or business.² A home office will qualify as a taxpayer's principal place of business if both of the following are true:

(1)  The taxpayer uses the home office exclusively and regularly for administrative or management activities of the trade or business; and

(2)  The taxpayer has no other fixed location for conducting substantial administrative or management activities of the trade or business.³

That a taxpayer chooses to have a third party perform administrative or management activities (such as billing) for the taxpayer will not, in itself, cause a disallowance of the
deduction.

Example: Josh is an electrician who is self-employed. Most of his time is spent on-site with customers examining and repairing their electrical systems, but he maintains a small office in his home that is used exclusively and regularly for activities such as ordering supplies, calling his customers and keeping his books. Josh writes up estimates and records of work completed on-site at his customers' premises. He has engaged a local bookkeeping service for billing his customers, but he does not conduct any other substantial administrative or management activities outside of his home office. His home office will qualify for a home office deduction.

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Planning Point: If the taxpayer is an employee and uses part of the taxpayer's home for business, the taxpayer must be able to show that, in addition to the requirements discussed above (1) the use is for the convenience of the employer and (2) no part of the home is rented to the employer and used to perform services as an employee for that employer.⁴ Note that the 2017 tax reform legislation eliminated the deduction for expenses associated with the trade or business of being an employee (in other words, the home office deduction for traditional W-2 workers was suspended for 2018-2025).

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If the home office is merely appropriate and helpful, the deduction for home office expenses will be disallowed.⁵

For tax years beginning on or after January 1, 2013, the IRS has authorized an optional safe harbor method for calculating the amount of a taxpayer's home office deduction. The taxpayer calculates the home office deduction by multiplying the square footage of the home used for business purposes by a prescribed rate of $5.00. Under this safe harbor, the maximum allowable portion of a home that may be used for qualified business purposes is 300 square feet, which results in a maximum allowable home office deduction of $1,500.⁶