The Tax Cuts and Jobs Act of 2017 may have eliminated home office tax deductions for employees, but new regulations may change that.
Freelancers, entrepreneurs, and other employees who currently work from home can receive a substantial tax break in the coming year. These new tax breaks come after many individuals have been forced to work from home during imposed lockdown measures by state and the federal government. New home-office tax breaks will ensure that self-employed individuals will be able to claim various items, modifications, and home office renovations.
The Tax Cuts and Jobs Act of 2017 allows many corporations and other large businesses to receive a tax break. It has also managed to bring down the corporate tax rate from 35% to 21%. The same act has eliminated the tax break and return filing for home workers and at home office employees.
But, as millions of new freelancers and entrepreneurs seek out new ways to retain additional income during the economic recession, new tax breaks will ensure them to claim certain items and customizations.
Who Qualifies for the Tax Deductions?
The new tax break will apply to any employee who has identified and registered themselves with the Internal Revenue Service (IRS) and has a self-employment income. With this, the tax breaks will allow these individuals to claim certain deductions on their home office expenses.
It’s important to note that these tax cuts will only be granted to those employees who have a physical working space or home office that they frequently use to see clients, make phone calls, or any other business transactions.
Which Expenses Are Deductible?
There are two main channels that freelancers and entrepreneurs can follow to claim certain deductions.
The first is using the prescribed deduction based on the physical size of your home office. Employees can deduct $5 per square foot up to 300 square feet, offering a maximum deduction of $1,500. There aren’t specific requirements on how your office should look or the size it should be. That being said, a kitchen table won’t qualify as a home office.
The second method, the actual-expense method, offers employees the ability to deduct certain individual expenses associated with their business or home office. These itemized deductions can include purchasing new equipment such as a computer, laptop, noise-canceling headphones, desks, and office chairs. The actual expenses deducted can accumulate to around $1,500 in deductions.
Although there is an option for itemized deductions, employees should be aware that these deductions or tax breaks will only apply if your home office space and new equipment are being used solely for your business. Any new items that have been purchased over the last few months but are not directly used in your business won’t classify for deductions.
To ensure you qualify for a tax break, employees will need to retain every receipt or tax invoice from goods purchased or renovations brought on to their home office. You must keep a good record of what the business expenses were during these times, and whether those new additions to your home office qualify you for a deduction.
Repairs made to your new home office (e.g., fixing doors, installing soundproofing walls, and repainting) can also be filed under deductions.
Because this tax break is relatively new, there are some imposed limitations. Freelancers, entrepreneurs, or other home office workers cannot include indirect expenses, including:
Security system costs
General home maintenance
Home maintenance not deliberately intended to extend or create a new home office does not qualify for a deduction.
The new tax break will only apply to employees who receive a self-employment income. Overall, though, this tax break is what many individuals may need to acquire additional tax returns in the coming year.
It’s good to know that these new tax breaks do exist and are open to any employee who receives a W-2 tax return form. Moreover, freelancers and entrepreneurs are urged to keep track of their expenses and ensure to allocate the right amount of business expenses on their returns.