If you’re anything like us, you’re already thinking about what deductions you can be making come tax season. Sadly, one you might miss out on is a home office tax deduction in 2020, since the Tax Cuts and Jobs Act eliminated unreimbursed employee expenses for almost all W-2 workers in 2017. That means, from 2018 to 2026, employees cannot deduct home office expenses unless they are a member of four protected groups. Which is a bummer with so many of us setting up our new home offices thanks to COVID, right?
You’re not the only one who is disappointed by this change. Deducting home office expenses and other business-related expenses was beloved. In 2015, those who itemize deductions did so to the tune of $96 billion in unreimbursed employee expenses.
Unreimbursed employee expenses include job-related mileage, long-distance travel for work, union and association dues, continued education costs required for your current job, job search expenses (for the same occupation), a home computer, and a home office used at the convenience of your employer.
All miscellaneous itemized deductions (including the home office deduction) will return in 2026. Until then, you won’t be missing out on any home office deduction because almost no one else can deduct those expenses—no one but four groups of employees who are the exception to the rule.
Only “Exceptional” employees qualify for a 2020 home office deduction.
The four types of employees who are eligible to deduct unreimbursed business expenses are:
An employee with impairment-related expenses,
a fee-basis state or local government official,
a reservist in one of the Armed Forces, or
a qualified performing artist.
For all the details on how to qualify for one of the four groups, the limits of each group’s eligible expenses, and necessary forms, see Publication 529 (Revised 12/2019) Miscellaneous Deductions.
Independent Contractors can deduct business expenses
There are many terms for those working from home: teleworker, remote worker, home-based worker, cyber commuter, distributed worker, smart working (UK), and workshifting (Canada), virtual worker, and freelancer. However, not everyone who works from home for a business is an employee, some are independent contractors.
Independent contractors—sole proprietors or single-member limited liability corporations—are eligible to deduct business expenses, including home office expenses. Telltale characteristics of independent contractors are that they submit invoices for their work and they are responsible for paying federal and state taxes. Additionally, a business cannot dictate how the work is done, the hours the work is done, or where the work is performed.
Many companies offer their employees flex work arrangements or telework agreements that allow more latitude with regard to where and when qualified employees may work so long as the work gets done. Teleworkers are not able to deduct home office expenses in 2020.
Working at the convenience of an employer
You probably caught the wording that home office use at “the convenience of the employer” was a qualification for deducting those expenses.
Then why isn’t working from home to reduce the spread of COVID-19—with or without a state stay-home order—convenient for employers?
Here’s how the IRS views working from home at the convenience of the employer:
Working from your home office is a condition of employment.
Working in your home office is necessary for your employer’s business to function.
Your home office is needed to properly perform your duties.
Generally speaking, if you are provided an office space you cannot deduct your expenses related to working from home, no matter how much more productive you are at your kitchen table.
Does a home office need a door?
If you are like the millions of U.S. workers enjoying the 2-minute commute downstairs and wearing comfy footwear (hello, slippers!) to work, it may surprise you what the IRS considers a home office.
A home office does not need to have a separate entrance or be a stand-alone building in your backyard to qualify but it does need to meet two requirements:
The space needs to be used regularly and exclusively for work.
The space is your principal workplace or where you regularly perform administrative or managerial duties.
Duties that qualify as administrative or managerial include, but are not limited to:
- Billing clients or patients,
- Writing Reports,
- Scheduling appointments, and
For all of you who operate your business from your home to help with childcare, to comply with stay home orders, or to protect others then make sure that you are keeping good records of your home office use. No matter the type of method you use to calculate your home office deduction, good business expense records will make the process of filing much easier.
How much of a tax break is a home office deduction?
To find out how much a home office deduction is worth, you will first need to determine which method of deduction—simplified (aka safe harbor) or regular—best suits your situation.
The IRS provides a chart comparing the two methods of calculating a home office deduction.
The safe harbor “simplified” method is a straightforward deduction of $5 per square foot (not to exceed 300 sq. ft or $1,500).
The regular method deducts a percentage of actual expenses including, mortgage interest, insurance, utilities, repairs, and depreciation based on the percentage of the home space used exclusively and regularly for business purposes. Depending on your home office size and your market (i.e. a high rent, metropolitan area), the deduction will be higher than $1,500 using the regular deduction method.
When choosing whether to use the simplified or the regular method remember these tips:
Tip #1: For either method, the space must be used exclusively and regularly for business purposes.
Tip #2: Regardless of the method chosen, the amount of the deduction cannot exceed the gross income from the business use of home less business expenses.
Tip #3: Once you choose to use the simplified method for a taxable year you cannot deduct actual expenses related to the qualified business use of the home.
Tip #4: Once a method of deduction is applied to a given year, you cannot retroactively change the method used for that same year.
Tip #5: You can use the simplified method one year and the regular method of calculation the next year.
Curious about how much you could save as a remote worker? Check out the Telework Savings Calculator™ created by Global Workplace Analytics.
State Home office deductions not to miss for employees or employers
W-2 employees may not be able to deduct home office expenses from their 2020 federal taxes, but those who pay taxes in Alabama, Arkansas, California, Hawaii, Minnesota, New York, or Pennsylvania are eligible to itemize unreimbursed employee expenses on their state taxes.
Moreover, if your company has employees working from home in another state due to COVID-19, be sure you know what your business tax nexus is in those states. Certain states have established a “Convenience of the Employer” test that sets a guideline for COVID-19 related telecommuting and sources that workers wages to the employer’s location. inDinero can help to ensure that your payroll withholdings are compliant and accurate.
The bottom line of working from home for employees and employers
In May 2020, CreditCards.com found that employees working from home, on average, are spending $108 more per month on groceries and utilities. The online survey included 2,768 adults. Furthermore, the survey found a trade-off of costs for households working from home. As the cost of groceries (increased $182 on average) and utilities (increased $121 on average) went up, childcare, public transportation, eating out, and dry cleaning costs all went down.
Before the pandemic, flex work was becoming more common. In 2018, 5 million workers or 3.6% of the U.S. workforce worked from home half-time or more. On average, employers saved $11,000 per half-time remote worker and employees saved $2,500 and $4,000 per year working from home two to three days a week.
Recently, Korn Ferry heard from 58% of employees surveyed that they are more productive working from home and only 14% of employers surveyed said that returning to the office would be mandatory. It would seem that working from home is working out for both employees and employers.
The bottom line is that employers who want to keep their talent happy and productive should consider reimbursing their employees for costs associated with working from home.
inDinero knows that payroll and employee benefits are complicated decisions for every employer.
However, we wouldn’t want you or your employees to miss out on higher productivity, greater work culture satisfaction, and a safer workforce because TCJA eliminated the home office deduction.
inDinero can help your company retain talent and keep productivity up by advising on reimbursing employees for home office and other business expenses. Talk to an expert.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.