Does Your Workstation Qualify for a Home Office Tax Deduction?

Over the last 18 months or so, the modern world has seen maybe its largest-ever migration to home office work. Due to COVID-19 and other societal changes, more people than ever began working from home — and while some have gone back into the office, many remain primarily utilizing a home office setup.

At Xidax, while our primary focus is on gaming computers and devices, we’ve also been happy to serve the work-from-home community in recent years with our wide selection of high-quality workstations, meant specifically for high-level professional work. If you’re building or upgrading a home office in any way, whether it’s for a recent change or a situation you’ve been in for years, we have the best products in the industry to support your computing needs.

In addition, we’re here to make sure you’re aware of an important element you should be considering if you work from home: The Home Office Tax Deduction, which may be available to you if you’ve paid for any part of your home office. Do you qualify, and how can you capitalize on this often-large deduction? Here’s a basic primer.

Do You Qualify?

One important note, which we’ll put here first so those who are ruled out by it won’t have to read any further: If you are a W2 employee, you do not qualify for a home office tax deduction under current laws — even if you’re working from home right now. This is because you’re compensated for your work and time, and “business use of the home” doesn’t apply to you.

If you’re self-employed or are not a W2 employee, however, you may be able to qualify for this deduction if you meet the following two conditions:

1) The space in question is used exclusively for business purposes. You cannot use it for other, non-business purposes. Not storage, not an extra bedroom; nothing but office work and related tasks.

2) The space in question is your primary place of business. If you typically leave and work elsewhere, it doesn’t count.

These are relatively broad requirements, and allow for many different situations — but make sure you understand them clearly before proceeding.

What Can You Deduct, and How?

If you meet the above criteria, congratulations! You may be able to get a sizable deduction for your home office. It’s not the easiest thing in the world to claim, however; there are many moving parts involved here.

There’s a few categories of items that may be deductible — though if so, there are important limitations on them we’ll discuss shortly. It’s simply not possible to deduct everything you’ve paid for a home office, but there may be sizable deductions available. Here’s some of the categories to keep an eye out for when filing:

• Real Property Taxes
• Utilities (phone, gas, electricity)
• Heating and Cooling
• Insurance
• Repairs

These five are probably the biggest potential deductible items — though it’s important to understand that you cannot simply look up the average cost of these things for your area and use that number. Instead, there are some very specific rules involved with this.

• For real property taxes, if your home office is in a detached structure (not attached to your primary residence), your deduction is limited to the total amount of state and local taxes you paid on the property you’re using as a home office, divided by the total square footage of your entire house. If your home office is attached (either completely or by some “unusual architectural feature” — like a single-width doorway), that limit rises to 10% of your total house’s real estate taxes.
• If you rent and you’re using a portion of your landlord’s office, there are different rules for this. You can’t just divide that number by the total square footage — instead, you have to compare your rent to some estimate of fair market value. A good rule is taking some online “what would similar properties in my area cost?” calculators and finding out what the monthly cost for a home office as small as yours might be — if you can match or beat that number, it may be deductible. In addition, the rules say you have to have some kind of “exclusive use” agreement with your landlord. Don’t hassle them about this — just indicate on your rent check that this money is bringing your monthly rent payments to some specific number.
• For utilities, you have to divide your total by the total square footage of your home — just like real property taxes. If you’re not renting or do not have an exclusive agreement with your landlord for use of any space, these may also be deductible as a rental expense. Again, if you can check an online calculator for what similar properties are running, that may be the best way to track down some ballpark numbers.
• For heating and cooling costs, you can choose between an actual deduction or a standard amount based on your area’s climate — again, you have to divide this by the total square footage of your home. For insurance, if any portion is paid by your employer, it cannot be deducted. This deduction is limited to the total amount you pay out of pocket for expenses related to that part of your home set aside as an office — so long as it meets the two criteria given above. Repairs are an interesting case; if something’s broken and requires fixing, you can deduct this. However, if something’s broken and you just choose to replace it — a chair with a ripped seat, for instance — that cannot legally be deducted.

What Can’t You Deduct?

Unfortunately, there are a number of expenses related to home office work that simply cannot be deducted. There’s no way around the fact that this will eat into your potential savings — but it’s important to be aware of these items so you don’t repeatedly try to count them.

First, do not include money spent on home improvements. This is particularly true for those expenses that are meant to increase the value of your property; if you’re using part of your house as an office (and it meets the other criteria for deduction), it does not count as a home improvement — and you can’t take that into consideration when calculating whether or not your office expenses are deductible.

Secondly, do not include depreciation costs. While this may seem like an odd item to come up as “not deductible,” this refers specifically to those expenses meant to reduce the value of your property for tax purposes. For example, if you have a home office that’s detached from your primary residence and is in a garage — or even just is not attached to your house at all — then there are depreciation costs you can take into consideration, but the line must be drawn somewhere, and it happens to be in this area.

For more on home office tax deductions for your workstation or any other setup, or to learn about any of our gaming computers or other laptops and desktops, speak to the staff at Xidax today.