Tax reform made a lot of changes to business accounting, and while high-profile moves, like reduced rates for corporate and individual income taxes, got a lot of attention, some of the smaller changes largely went unnoticed. One change you may not have heard about was the elimination of the deduction for those employees who maintain a home office.
For tax years 2013 to 2017, a person working outside the home for their employer could claim the home office deduction on a Schedule A under miscellaneous itemized deductions. With tax reform, you can only claim this credit if you’re self-employed and file a Schedule C.
Tax reform eliminated the employee home office deduction by taking away the ability to claim miscellaneous itemized deductions. They were only deductible to the extent that they, along with any other miscellaneous deductions, exceeded 2% of your adjusted gross income. But that still was enough to be valuable for employees in many cases.
Now that miscellaneous itemized deductions aren’t allowed anymore, employees don’t have anywhere to claim home office expenses. The higher standard deduction might make up for that loss for some taxpayers, but others still will see a tax hit from the loss of the break.
But tax reform didn’t take away home office expense deductions for everyone. If you’re self-employed, nothing has changed, and you still can claim the deduction on your Schedule C as you used to.
To qualify for the home office deduction, the part of your home attributable to business must be “exclusively and regularly for your trade or business” and that part of your home must either be your principal place of business, a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business or a separate structure used in connection with your trade or business.
In other words, your home office must be your actual office and not just at your home for convenience. And more importantly, if you use part of your home as a workspace, then it must be space that is used solely for business.
There are two ways your accountant in Springfield Missouri can calculate your home office deduction.
1) The simplified method says you can deduct $5 per square foot used for business, up to 300 square ft. There are additional rules regarding depreciation and carryover losses.
2) The regular method for calculating your home office deduction requires you to keep track of your household expenses (mortgage, utilities, repairs, insurance, etc). The amount you can write off, then, is based on the percentage of your home designated for business use.
You may choose to use either the simplified method or the regular method for any taxable year, but once you have chosen a method, you can’t switch during the same year.
If you have any questions about how the new tax laws impact your home office deduction business accounting in Springfield Missouri, please contact your tax consultants at Schultz, Wood, & Rapp.