Remote Worker Tax Deductions: What You Can and Can’t Claim

With the rise of remote work, understanding tax deductions for home office expenses has become increasingly important. Many workers are seeking ways to maximize their tax savings by claiming eligible deductions related to their at-home workspace.

Eligibility Requirements

To qualify for remote work tax deductions, the IRS requires that the home office be used exclusively and regularly for business purposes. It cannot double as a personal living area, and failing to meet this criterion disqualifies taxpayers from claiming deductions. Additionally, the home office must serve as the principal place of business, where substantial administrative or management tasks occur. For instance, if a remote worker primarily works from home but occasionally visits a corporate office, the home office can still qualify.

Self-employed individuals and independent contractors have more flexibility in claiming these deductions than employees. The Tax Cuts and Jobs Act of 2017 eliminated the ability for employees to deduct unreimbursed business expenses, including home office costs, on federal tax returns. However, self-employed individuals can claim these deductions on Schedule C if they meet eligibility criteria.

The Exclusive Use Rule

The Exclusive Use Rule determines whether a taxpayer can claim home office deductions. The space must be used solely for business activities, with no personal use. For example, a dining table that serves as a workspace during the day and a family dining area at night does not qualify.

Shared spaces can complicate compliance with this rule. The IRS requires clear evidence that the area is dedicated to business activities. Photographic evidence, detailed diagrams, or logs of business activities conducted in the space can help substantiate claims and demonstrate adherence to this rule.

Types of Deductible Expenses

Deductible expenses must directly relate to the operation and maintenance of the home office and meet IRS criteria for business use.

Workspace Setup

Setting up a home office can involve substantial costs, many of which may be deductible. Expenses for office furniture like desks and chairs, as well as equipment such as computers and printers, can be depreciated over their useful life under the Modified Accelerated Cost Recovery System (MACRS). Smaller items costing $2,500 or less per invoice or item can be expensed immediately under the de minimis safe harbor election. Keeping detailed records, including receipts and invoices, is essential to substantiate these deductions.

Utilities and Internet

Utilities and internet expenses are deductible based on the percentage of the home used for business purposes. For example, if a home office occupies 10% of the total square footage, 10% of utility bills, such as electricity and heating, can be deducted. Internet expenses follow the same allocation method. Differentiating between business and personal use is critical, as only the business portion is deductible. Accurate calculation and documentation, including monthly bills and the business-use percentage, are essential. IRS Form 8829 can be used to calculate and report these deductions.

Necessary Supplies

Supplies essential for operating a home office, such as paper, pens, and printer ink, are deductible. These items are typically deducted in the year they are purchased, as they are considered ordinary and necessary business expenses under Internal Revenue Code Section 162. Supplies must be used exclusively for business purposes to qualify. Keeping a detailed log of purchases and their business use, or using a separate business account for these expenses, can simplify record-keeping and ensure accurate deductions.

Allocating Shared Costs

Shared costs, such as mortgage interest, property taxes, and homeowners insurance, must be allocated based on the proportion of the home used for business purposes. The square footage method, which calculates the percentage of the home office relative to the total home area, is widely used. For example, if a home office occupies 200 square feet in a 2,000-square-foot home, 10% of shared costs can be allocated to business use.

Alternative methods, like the number of rooms method, may be used if they better represent business use. For instance, if one of five rooms is used as an office, 20% of shared costs can be allocated. Consistency in the chosen method is important unless circumstances significantly change.

Reporting Deductions on Tax Forms

Once eligible home office deductions are calculated, they must be accurately reported on tax forms. For self-employed individuals, the primary form is Schedule C, which reports income and expenses, including home office deductions. Proper categorization on Schedule C is critical to avoid errors that may trigger an audit. Form 8829 is used to calculate the allowable home office deduction and requires the business-use percentage of the home, based on the chosen allocation method. Consistency between these forms is essential to prevent discrepancies that could attract IRS scrutiny.

For those operating a home-based business within a partnership or corporation, deductions must be claimed through the business’s tax return. This typically involves providing documentation to the business entity, which then reports the deductions on forms like the 1065 for partnerships or the 1120 for corporations. Detailed records are vital, as the business entity is responsible for compliance. Understanding these forms and accurately reporting deductions can help ensure a smooth tax filing process.