Working at home could potentially offer some desirable tax benefits. If you are entitled to the home office tax deduction. You may be able to deduct all direct expenses and part of your indirect expenses incurred in connection with working at home. Note, though, that the qualification for these deductions became more difficult in accordance with the Tax Cuts and Jobs Act of 2017 (TCJA).
If you have previously claimed an office in the home as a miscellaneous tax deduction on your personal income tax return, the TCJA eliminated this deduction for the tax year period 2018-2025. Now you need to file a Schedule C on Form 1040 in order to qualify for the home office tax deduction.
What Room Can Be Eligible?
Direct expenses are expenses that are only applied to your office at home. The expense of decorating your office in the home is an example of a direct cost. Indirect expenses are costs that will benefit your whole home, like the rent payment, deductible interest on loans, real estate taxes, and homeowners’ insurance. You may be able to deduct only the business part of your indirect costs.
Your home office may be a room in your house, a part of a room in your house, or in a separate building adjacent to your house that you are using to conduct commercial activities. To be eligible for the tax deduction, that portion of your house must be one of the following:
Your primary place of business. This requires that you demonstrate that you are using a portion of your household exclusively and on a regular basis as a principal place of business for your trade or company.
A location where you meet customers, clients, or patients. Your home office might be eligible if you’re using it completely and frequently to meet up with customers, clients, or patients in the ordinary course of your profession or company.
A distinct, separated structure that is used in relation to your professional or trade activity. A storage shed or unattached garage can qualify for a home office tax deduction if this is the location that you use often and exclusively in relation to your trade or company.
A location where you store up inventory or product samples. You will need to use the room on a routine basis (although not necessarily solely) for the storing of inventory or product samples that you are using in your trade or business of selling goods at retail and wholesale.
Note: If you are setting apart a room in your home as your office at home and you are also using the room like a guest room or den, then you will not comply with the “sole use” litmus test.
If you choose not to keep track of your costs, there is a streamlined method that enables eligible tax payers to take $5 for each square foot of office area, up to a limit of three hundred square feet.
The wonderful part of this is that you do not need to consider depreciation allowance for a home office, and you could switch over from one year to the next in contrast to other tax deductions.