Working from home has multiple perks, not the least of which is the short commute to your home office in your PJs. (Yes, it’s a cliché, and yes, it happens.)
But while you might be incredibly talented at designing websites, writing novels, or whatever it is you do during your 9-to-5 at home, nearly all of us have the potential to get tripped up during tax time.
Granted, working from home—either part time or full time—provides plenty of ways to save on taxes. But within those opportunities lie pitfalls galore (especially now that the new Tax Cuts and Jobs Act is in full swing), and they could lead to an IRS audit.
To help you stay in the clear when filing for the 2020 tax year, here's a rundown of these six tax mistakes people often make when they work from home.
1. Assuming you can deduct your home office
If you work from home for a larger corporation (if you receive a W-2, that's you), you cannot deduct the costs associated with a home office. Sorry, telecommuters!
And for all you W-2 employees stuck working at home during the coronavirus pandemic? You don’t qualify for this deduction either. The Tax Cuts and Jobs Act removed the home office deduction for workers who conduct business at home but still have a full-time employer.
Self-employed individuals, however, can still take the deduction, provided they have a dedicated, work-only space. (See below.)
2. Neglecting to take all of your deductions
Some of the best perks of being self-employed and working from home are the many deductions you can take for various expenses. However, a few are commonly overlooked, says Josh Zimmelman, owner of Westwood Tax & Consulting in New York City.
For instance, many don't realize that they can deduct the percentage of their internet, landline, and utilities that are used for work.
Those who work from home can also deduct transportation costs to outside meetings, dues for professional development, and regulatory fees or licenses paid to state or local governments. So if you use any of those, make sure to add them to the heap!
3. Taking too many suspicious deductions
On the other hand, some self-employed folks put themselves at risk of an audit by trying to write off bogus expenses, Zimmelman cautions.
“In order for an expense to be deductible, it must be ‘ordinary and necessary’ to run your business," he says.
Just because you’re at home while you work doesn’t mean you can write off that fancy new espresso maker, for example; nor should you write off lunch with your spouse at that bistro down the street (unless you're in business together, and it was a working lunch).
4. Taking an inappropriate rent deduction for your home office
Working from home doesn’t automatically mean you can deduct a portion of your rent (or monthly mortgage fees) for the square footage you devote to a home office.
There are two main criteria for legally using this deduction, says Jason Miller, tax manager at Nussbaum Yates Berg Klein & Wolpow in New York City.
Your home office must be exclusively a home office, not sometimes used for professional use and sometimes for personal use. That means your kitchen counter, guest room, or TV room with a computer doesn’t count. In IRS parlance, they are looking for “regular and exclusive” use, Miller says.
Your home office must be your principal place of business. If you work at home and have an office outside the home, remember that you are not allowed to take the home office deduction, he says.
5. Commingling personal and business spending
Too many work-from-home professionals miss out on deductions because their finances are in serious disarray, Zimmelman finds. An easy solution is to carefully track business spending by setting up separate checking, savings, and credit card accounts.
You also need to keep meticulous records of what equipment is used for business activities and what is personal. So, for example, if you have one cellphone for both professional and personal use, you can deduct a percentage of the expenses on your tax return, based on the percentage of use.
“You’ll need detailed call logs or other documentation to back that up,” he says.
6. Thinking credit card statements are sufficient to prove expenses
Do you blithely toss receipts because you consider your credit card statement to be adequate proof of your expenditures? You could be in trouble if you’re one of the unlucky people to get audited.
“The IRS will not accept credit card statements as backup, because they do not show itemized details of what was purchased,” says Miller.
For example, say you have a charge from an office supply store for $1,500 on your credit card. The IRS cannot determine whether the purchases were for legitimate office needs or whether you were buying computer components for your teen.
Plus, remember that in an audit, the burden of proof still remains on the taxpayer to prove or substantiate expenses. So keep saving those receipts! Apps abound, so you don't have to stuff them in a shoebox; there's even one called Shoeboxed, which scans and saves receipts for future reference.