2020 has been a difficult year that has significantly affected the traditional American business environment.
A Stanford University study found that about 40% of the U.S. workforce now works from home full time due to COVID-19. This has led many to wonder about the effect this might have on their taxes.
In 2017, the Tax Cuts and Jobs Act (TCJA) made sweeping changes to federal income tax law. A notable change has been made to the home office deduction. Prior to the TCJA, W-2 employees could potentially claim a tax deduction for unreimbursed employee business expenses, including qualifying home office expenses, if they itemized their deductions and met the gross income threshold. adjusted (AGI) by two percent (2%) for miscellaneous expenses. .
Under the TCJA miscellaneous expenses have been completely suspended. In other words, the number of taxpayers who could claim the home office deduction was severely limited. W-2 employees can no longer claim a federal home office deduction, even if their employer requires them to work from home.
Instead, after the TCJA, qualifying home office expenses are only available to the self-employed or those who hold interests in partnerships and use their homes “regularly and exclusively” for business during the course of the year. the tax year.
Unfortunately, there has been no revision of the TCJA headquarters rules included in the CARES 2020 law or the 2021 Consolidated Appropriation Law.
OWNERS OF PARTNERSHIP INTERESTS
According to the IRS, partnership expenses are only deductible on a personal return if the partnership agreement specifically states that the partner must pay the expenses personally. Therefore, if you want to claim a home office deduction related to your partnership activity, make sure that your partnership agreement includes wording that each partner must pay these expenses personally without reimbursement.
This language includes the following elements:
âª Expenses that are directly attributable to the home office, such as repair and maintenance costs performed at the home office, are fully deductible up to the business income limit;
âª Indirect expenses must be split between personal and business use and are also subject to the limitation on business income. Some examples of common indirect expenses include property taxes, rent, depreciation on a home you own, homeowners association fees, utilities, and property and casualty insurance premiums. A reasonable method of allocation should be used. Although a ratio based on the area of ââthe home office to the total house is the most common method, the number of rooms used for personal use versus professional use has also been allowed; and
âª The home office expense deduction is limited to the gross income generated by the activity for which the home office is used. This is called the limitation of business income. Limited deductions can be carried over to subsequent years.
While the pandemic appears to be abating and the lives of many have started to return to some version of normal that we are used to, working from home is likely to continue as many companies are making the switch to meet this interest.
Being aware of the latest deductions allowed by the IRS will be important for employees this year, so it is always advisable to consult a tax professional for additional advice.
Cesar Ravan, CPA, is a managing partner at Ravan + Co., a chartered accountancy firm. He can be reached at 786-574-2367 or [email protected]