Due to unforeseen circumstances of COVID-19 many clinicians have opted to move from their office space to work from home.
For those clinicians who are self-employed and have chosen to work out of an area of their home, you may qualify to deduct “home office” expenses so long as you satisfy the IRS strict rules regarding the deduction.
Do I qualify?
In order the qualify for the home office deduction the taxpayer must meet both the exclusive use test and regular use test.
1. Under the exclusive use test, you must use a specific area of your home only for your trade or business. If the area of your home is used for both business and personal use, then this would not qualify. For example, if you are meeting and dealing with patients in your living room but your family also uses the living room for recreation, then this area would not qualify.
One other item to note is that this space does not need to be marked off or a separate room. So long as a portion of your home is used exclusively for business use it will qualify.
2, Under the regular use test, you must use a specific area of your home for business on a regular basis. Incidental or occasional use is not considered regular use. However, to determine if your use constitutes regular use, all the facts and circumstances must be taken into consideration. They key is to be using it according to a regular and predictable schedule.
For many self-employed individuals, the use of their home has been to meet with patients, clients, or customers. Under the IRS regulations governing the home office deduction, there are additional tests that must be met if you fall into this category:
To qualify, you must physically meet with patients, clients, or customers on your premises, and their use of your home is substantial and integral to the conduct of your business. Per the IRS, doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement.
What about virtual appointments?
We have received questions from many clinicians conducting virtual appointments to see if it will meet the requirements of the home office deduction.
In our opinion, so long as the area in which the virtual appointments are conducted is used solely for business, then home office expenses should qualify for the deduction. Virtual appointments will still meet the regular use test as they create a predictable and regular schedule, even though they are not meeting in person.
However, this is new territory due to COVID, and at this time we do not have guidance from the IRS. Therefore we are not sure how they will respond. In response to this uncertainty, it is our recommendation that you keep strong records, such as schedules and logs, to support exclusive and regular use if the meetings are virtual.
What expenses can I deduct?
For the home office deduction, expenses are broken down into two categories, direct and indirect.
First and foremost, there are direct expenses, which are expenses only for the business part of your home. These direct expenses are deductible in full. Common direct expenses include, painting, office furniture, or necessary repairs only in the area used for the business.
The next category of expenses are the indirect expenses, which are expenses for keeping up and running your entire home. Examples of indirect expenses are insurance, utilities, and general repairs. These expenses are deductible based on the percentage of your home used for business.
Most tax professionals use square footage of business use divided by the total home square footage to determine the percentage to be used to calculate indirect expenses.
If you rent rather than own your home, you can deduct a percentage of your monthly rent and renter’s insurance as part of the home office deduction.
If you are a homeowner, you can claim a portion of your mortgage interest and real estate taxes as a business expense on Schedule C (Profit or Loss From Business). The remainder of these expenses, or the personal use portion, can then be deducted on the Schedule A (Itemized Deductions) as an itemized deduction for those taxpayers who itemize.
For example, if you pay $6,000 in real estate taxes on your home and use 10% of your home exclusively for business purposes, $600 would be expensed on your Schedule C as a home office deduction and the remaining $5,400 would be carried over to your Schedule A.
Homeowners are also entitled to deduct depreciation. Depreciation is an allowance for the wear and tear on the part of your home used for business. Calculating depreciation is complex, so we recommend talking with a tax professional. Below is the information that a tax professional will request:
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- The month and year you started using your home for business
- The cost and fair market value of your home at the time you began using it for business
- The cost of any improvements before and after you began using the property for business
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Alternate method of calculating expenses
The IRS does offer a simplified method of calculating the home office deduction. Under the simplified method your deduction is calculated by multiplying $5 by the square footage of the area used exclusively for business. While this method is indeed easier to calculate, in practice we have seen that It has resulted in a smaller deduction than if you were to calculate the deduction using the regular method.
While this information should give you a solid understanding of the basics of the home office deduction, it is always our recommendation that you meet with a tax professional to discuss how to file and best utilize this deduction.
For more details and tax forms regarding your home office tax visit the IRS website.
Note: The above is for educational purposes only and is not intended to serve as professional tax advice.
Diane V. Libby, a partner with Adams Samartino & Co., is a licensed CPA in Connecticut with over 3 decades of experience in public accounting. She is co-author (with Dr. Jeff Zimmerman) of the book, Financial Management for Your Mental Health Practice:Key Concepts Made Simple.
Diane holds a Master’s Degree in Taxation from the University of Hartford and is a member of the Connecticut Society of Certified Public Accountants. Additionally, she serves on the Board of Governor’s for Charlotte Hungerford Hospital.