If you are self-employed and conduct business from home, you may be eligible to take a home office deduction. There are strict tax rules governing eligibility. But stay-at-home orders may allow for a partial year deduction in some cases. This is my educated guess (it’s not tax advice; it’s provided for information purposes only).
Basics of the home office deduction
To claim the write-off, you must use a portion of your home regularly and exclusively for business. A spare bedroom or an undisturbed corner of a family room used only for business is fine; the kitchen table where you have meals is not.
The home must also be the principal place of business, a place to meet or deal with patients, clients, or customers in the normal course of business, or a separate free-standing structure (e.g., a workshop or studio in a barn). To be a principal place of business, you can’t have another fixed location, such as an office or retail store. But if you can’t access those in another location due to state-mandated business closures or stay-at-home orders, you may be eligible for a home office deduction for the portion of the year you work from home. At least, this is what makes sense to me.
Partial home office deduction
There are two ways to figure the home office deduction: writing off actual expenses allocated to the home office area or using an IRS-set simplified method of $5 per square foot up to 300 square feet of space.
In IRS Publication 587, it says in regard to figuring the simplified method that “if your qualified business use was for a portion of the year…, your deduction is limited to the average monthly allowable square footage. You calculate the average monthly allowable square footage by adding the amount of allowable square feet you used in each month and dividing the sum by 12. …[I]f your qualified business use was less than 15 days in a month, you must use -0- for that month.”
The following is an IRS example modified by me for the COVID-19 situation.
Amy normally runs a boutique on Main Street but closed up shop to sell online from her home on April 1, 2020, because of state orders. She used 420 square feet of her home regularly and exclusively for a qualified business use. She continued to use the 420 square feet until the end of the May (two full months). Her average monthly allowable square footage is 50 square feet, which is figured using 300 square feet for each month, April and May, divided by the number of months in the year ([0 + 0 + 0 + 300 + 300 + 0 + 0 + 0 + 0 + 0 + 0 + 0]/12). Her deduction is $250 (50 sq. ft. x $5).
Real estate taxes and mortgage interest
What happens with your real estate taxes and mortgage interest as a result of COVID-19 may impact your 2020 home office deduction if you use the actual expense method.
- Real estate taxes. It’s not likely that the amount of taxes due in 2020 will change, but depending on your location, you may have additional time to pay them. Check with your city or county on the deadline for paying your property taxes. Of course, if home values decline, property taxes for 2021 may lower, impacting a home office deduction for that year if you’re eligible to claim it then.
- Mortgage interest. If you obtain a deferral for payments, this will reduce your home office deduction for 2020.
Usually, if you live in one state but work in another, you must pay a portion of income taxes to the state in which it was earned. However, if you’re forced to work from home for a while, there may be a loophole to avoid paying any tax to that other state for this period. If there is a “necessity” to work from home, you likely don’t have to allocate any income to the state where you usually work. Allocate all of the income during the period of working from home to your home state. For example, you live in New Jersey but have an office in New York. Typically, you’d allocate your income to pay some New York income taxes. But it’s likely you won’t have to do so for the days you’ve been kept in New Jersey because of state mandates. Watch for more guidance from states on these allocation rules.
The IRS hasn’t issued any guidance on the impact of COVID-19 on the home office deduction. And states haven’t done so with respect to income allocations for state income tax purpose. All you can do is to monitor further developments on these matters.