This year, as a result of the COVID-19 pandemic, more people worked at home than ever before. As 2020 draws to a close, many employees may be wondering whether any of the expenses they incurred to work at home qualify for a tax break. For example, can they deduct the expense of new computer equipment or office furniture, more robust internet service, or increased utility costs?
The short answer is “no,” remote employees can’t deduct the cost of working at home. But it may be possible to achieve a similar result if an employer pays or reimburses employees for these expenses.
TCJA suspended employee expense deductions
A couple of years ago, employees could deduct certain unreimbursed job expenses — including costs associated with working at home — as “miscellaneous itemized deductions.” The deduction was available to the extent that these expenses, together with other miscellaneous deductions, exceeded 2% of adjusted gross income. But the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated these deductions for 2018 through 2025.
Employer reimbursements may be deductible
Employee expenses paid or reimbursed by an employer may be deductible by the employer and excludable from the employee’s income, provided certain requirements are met. This is the case, for example, if expenses are reimbursed through an “accountable plan.” Under these plans, reimbursed expenses must have a business connection and employees must substantiate the expenses with receipts, canceled checks or other documentation.
Also, employees must be required to return any excess reimbursements within a reasonable time. If a plan isn’t accountable, expense reimbursements are treated as wages, subject to income and payroll taxes.
Another possibility is for an employer to treat these reimbursements as disaster relief payments under Internal Revenue Code Section 139. It appears that the COVID-19 pandemic qualifies as a disaster, allowing employers to take advantage of this provision.
Sec. 139 allows employers to make tax-free payments to employees affected by a federally declared disaster, subject to certain requirements. An employer may pay “reasonable and necessary” expenses incurred by employees as a result of the disaster. This may include home office expenses as well as certain non-job-related expenses, such as health and dependent care costs. Qualifying payments are fully deductible by the employer and excludable from the employee’s taxable income.
What about the home office deduction?
The home office deduction generally is reserved for self-employed business owners. Previously, employees could obtain the tax break and claim the deduction if they maintained a home office “for the convenience of the employer” and met certain other requirements. But under the TCJA, that deduction is unavailable for 2018 through 2025.
If, however, in addition to working at home for your employer you also do some freelancing or run a side business, it may be possible to claim a home office deduction, provided you otherwise meet the requirements. The two primary requirements for this tax break are that 1) you use a portion of your home regularly and exclusively for conducting business, and 2) the home office is your principal place of business.
If you qualify for the home office deduction, in addition to deducting direct expenses — such as computer equipment and office furniture — you also enjoy a deduction for a portion of certain household expenses, such as mortgage interest or rent, insurance, utilities, repairs, maintenance, and depreciation.
Do your homework
Were you required to spend a significant portion of this year working from home? If so, and if you incurred substantial expenses to make remote work possible, do your homework to determine whether you qualify for any of these tax breaks. We can help you with this determination.