COVID-19 and the Home Office Deduction

Roughly a third of Americans are still working from home because of the pandemic, and many mistakenly believe they qualify for the home office deduction. Here’s everything you need to know if you work remotely.

Since the beginning of the COVID-19 pandemic, around a third of Americans have transitioned to working from home. This means more video conferencing via tools like Zoom and Google Meets, more informal work attire, and benefits like avoiding a long commute each morning. But many newly remote employees struggle with new technologies and are concerned about expenses like Wi-Fi, printer ink, and new devices used for their job. 

While offsite workers have long taken advantage of the home office deduction, there’s now some confusion about who qualifies. Many individuals mistakenly believe they can now take the deduction since they’re doing all their work at home.

This home office deduction overview will cover:

  • Who qualifies for the home office deduction?
  • Other home office deduction requirements
  • How the pandemic impacts the home office deduction

Who qualifies for the home office deduction?

It’s first important to note that the home office deduction cannot automatically be claimed by anyone who works at home. If you’re a regular employee, you probably won’t be able to claim it. 

Before the 2018 Tax Cuts and Jobs Act was passed, the deduction could be taken by employees who were required by their employer to work at home, in many cases. But now, if you receive a W-2, you cannot claim the home office deduction at all. 

Therefore, employees who have shifted to remote work usually cannot claim the home office deduction, even if they have a dedicated workspace in the home. However, some employers may offer reimbursement for home office expenses, so it’s always wise to work that out with managers.

Who is actually eligible for the deduction?

  • Self-employed workers
  • Independent contractors
  • Some partners

If you own your own business, it doesn’t matter if you’re a homeowner or renter, as long as you have a home office that qualifies (more details on that below). 

Other home office deduction details

If you meet the above eligibility criteria, you also have to make sure that your home office qualifies. Here are other requirements for the workspace:

  • You must use the home office regularly and exclusively for business. This means that the space or room cannot double as a second bedroom or dining room, for example. The office doesn’t have to be a closed-off room.
  • The office must be the principal place of business. This includes holding meetings with clients or patients in addition to conducting other daily work tasks.

There are a couple of methods you can use to calculate your deduction. Starting in 2013, the IRS offers a simplified option, which takes care of the calculation and allocation with a standardized method. 

The regular method allows you to be more accurate, but it takes more recordkeeping and calculating. To get this number, you need to figure out the percentage of your home used as an office. 

How the pandemic impacts the home office deduction

While more workers than ever before are using a home office, the COVID-19 pandemic didn’t change much about the home office deduction. It still only applies to self-employed workers and contractors—not W-2 employees. 

The exception is for regular employees who also run a side business. Then, things get a little more complicated. 

For example, you may usually use your home office exclusively for your own side business. But if you have started working from home for your regular job and use your same office for that work, you can no longer claim the home office deduction for your side business because it is not being used exclusively for that purpose. 

Another potential change from the pandemic would be if you’re a partner in a business and you used to have a joint office that you don’t need anymore. Partners may qualify for the home office deduction as long as the space is the principal place of business, but these situations can be a bit more ambiguous and complex.

Still have questions? Hire a tax professional!

Even though W-2 employees may be working from home every day and have to foot the bill for Wi-Fi or office supplies, they’ll need to contact their employers about those issues. Unless you’re a self-employed worker, you cannot deduct home office expenses on your tax return.

If you’re still unsure about your deductible expenses or tax changes because of COVID-19, a CPA can ensure you’re doing everything correctly.

Provident CPA and Business Advisors stands ready to help you prepare for taxes this year. Contact our team today to get started or learn more. 

How to Nail a 90-Day Action Plan

An action plan helps you reach both short- and long-term goals while developing foresight and flexibility

Creating a 90-day action plan for your business helps set and reach clear and realistic goals. This roadmap can also narrow down your short-term objectives to prioritize focus for a set period. And an action plan will help you apply what you learn during that time to the future.

Whatever you’re using this technique to accomplish—whether increasing revenue, getting more customers, or growing your business—you’ve got to nail it. Here are a few pointers for doing just that:

Set SMART goals

An action plan requires a set of desired outcomes, driven by how you want your business to look after 90 days. But where do you start? Make sure each of your goals, including daily and weekly targets as well as your 90-day goal, are SMART.

SMART goals are: Specific, Measurable, Achievable, Realistic, and Timely. Let’s dive into what these terms mean when you’re prioritizing.

  • Specific. It’s not enough to say that you want to increase revenue. You need to write down a number that you want to reach by day 90.
  • Measurable. How will you track progress? If your goal can’t be measured, it’s not a SMART one.
  • Achievable. Do you have everything you need right now to make it happen? You should have all the necessary resources before beginning.
  • Realistic. Make sure your goals are possible. SMART goals can be bold but not so aggressive that the desired outcome is a giant leap from what your business has accomplished in recent history.
  • Timely. While you have 90 days for your full action plan to come alive, create time-based targets within that period. Check off small steps that lead to the big payoff.

Another tip: It’s not enough to set these business goals on your own. Make sure your team is involved in planning. Emphasize how these goals align with the company’s overall vision so that everyone is aligned.

Determine cash flow requirements

For your 90-day plan to work, you need the right balance of income and expenses. How much money will you need to bring in regularly during this period? What expenses are you certain to have? What unplanned costs could potentially arise? 

Surprises happen, and three months is plenty of time for something to go wrong, even if it’s unrelated to the present goals. Categorize your costs into fixed and variable. For example, rent or space costs will be fixed, while supplies or salaries may be inconsistent.

Be prepared with a realistic cash flow plan. List your obligations and the actual cash you know you’ll receive. 

Identify other sources of income

Once cash flow is figured out, maybe you realize that your goals require a bit more money coming in regularly. Determine other income channels. Get creative. Involve other people who can think of additional sources or provide helpful perspectives.

And don’t underestimate the power of eliminating expenses. Negotiate with a vendor or research other businesses in the area that might be more affordable. If you have high debt payments each month, consider trying to defer payments or restructure your payment plan.

If you don’t have much debt, a business loan can help in a pinch. If the only obstacle to nailing your 90-day plan is more cash, a reasonable loan is not always a bad idea.

Be firm but adaptable

A 90-day action plan requires consistency and commitment. But there are always circumstances that arise to change plans quickly. Your benchmarks and goals may need to be updated within the quarter. 

For example, many small business owners had very different goals before the pandemic. But now, what they consider success to look like and the benchmarks they set are based on post-COVID numbers.

Try to stay flexible and celebrate small wins. This is where incremental steps are helpful as you are on the path to a 90-day desired outcome. 

Need outside help?

Often, an impartial, professional set of eyes can provide the perspective to clarify efficient planning. Provident CPA & Business Advisors can help you create the right strategy, set SMART goals, and track your progress along the way. We assist in planning for successful growth by identifying your critical drivers and creating the right budget. And our cash flow analysis focuses on the now to help you create a better future.

Contact the Provident team to learn more about our business strategy services.

COVID-19 Tax Deductions That You May Qualify For

The COVID-19 pandemic has activated provisions in the Internal Revenue Code (IRC) that could make you eligible for tax benefits for certain relief payments. Learn more about IRC Section 139 and other applicable tax credits.

Section 139 of the Internal Revenue Code (IRC) outlines rules and guidelines for disaster-relief payments. As COVID-19 continues to impact the economy, causing record unemployment numbers and business closures, this section of the tax code has been triggered.

Whether you’re an employer or individual, you could be eligible for certain tax deductions related to COVID-19. While the CARES Act has provided stimulus payments and other benefits to Americans and businesses, these additional tax credits offer further assistance for those struggling during the pandemic.

Here’s an overview of what you need to know about IRC Section 139, the FFCRA, and other tax credits related to COVID-19 that you could be eligible for.

Section 139 and FFCRA relief payments

Section 139 outlines how employers can handle relief payments to employees during a disaster. Applicable payments are those made to staff members who have been directly impacted by the pandemic. This compensation is deductible for the employer and will also be excluded from the worker’s income.

According to Section 139, a qualified disaster relief payment can include the following:

  • Reimbursement or pay for reasonable and necessary personal, family, living, or funeral expenses incurred directly from COVID-19
  • Reimbursement or pay for expenses to repair or rehabilitate a personal home or its contents, which are attributable to the pandemic

Qualifying payments will be free of income, payroll, and self-employment taxes.

Note that emergency relief payments made to employees from charitable organizations are covered under Section 139. This means that if a business makes disbursements through a controlled private foundation and other applicable guidelines are followed, payments will be tax-free. 

The Families First Coronavirus Response Act (FFCRA) outlines how employers can provide paid sick leave or family and medical leave related to COVID-19. If eligible, business owners can claim tax credits on these leave payments made to employees if they had to take time off work because of COVID-19. These provisions are in place from April 1, 2020, to December 31, 2020.

Eligible employers are businesses with fewer than 500 employees, and those required to pay qualified sick leave wages or family leave wages under the FFCRA.

The FFCRA covers employees for: 

  • Two weeks or 80 hours of paid sick leave at the same rate of pay if the employee is quarantined or experiencing COVID-19 symptoms
  • Two weeks or 80 hours of sick leave at two-thirds of their pay if they need to care for an individual who must quarantine or take care of a child who cannot attend school normally

Other COVID-19 tax benefits

If an individual has experienced significant impacts from COVID-19 and has an IRA, they can borrow up to $100,000 from the account and pay it back within three years of the date of withdrawal. This can all be done as if it is a tax-free rollover. There is also no limit on what can be done with the funds during the three years.

Another credit applicable to employers is the employee retention credit. This tax break encourages employers to keep their workers on the payroll during the pandemic. The credit is 50% of up to $10,000 in payments made by an employer impacted by COVID-19. Eligible employers include those whose business is wholly or partially suspended, or whose gross receipts are less than half of the comparable quarter in 2019. Once the receipts reach above 80% of the comparable quarter in 2019, they no longer qualify.

Additionally, the CARES Act allows for deferment of employment payroll taxes. Both self-employed workers and employers can defer social security tax to be paid at the end of 2021 and 2022.

Work with a tax professional to understand COVID-19 deductions

Still have questions about tax deductions related to COVID-19? These changing regulations can be complicated and confusing. Work with a tax professional who can ensure that you’re paying the least amount of tax legally possible. You must always be sure that you’re complying with all applicable laws while taking advantage of any deductions and credits for which you qualify.

The team at Provident CPA & Business Advisors is here to help you during this time of uncertainty and financial distress. If your business is seeing impacts from the pandemic, contact us to find the best way forward. We can help you focus on growth and profit improvement in addition to accounting and tax considerations.

Provident Tax-Saving Tips-COVID-19 Edition