The drastic work-from-home measures put in place to combat the spread of COVID-19 infection will reach their one-year mark in March, a milestone quickly followed by the April 15 deadline for filing 2020 tax returns.
Some newly ensconced work-from-home Americans may merit tax benefits from this change of scene. Other taxpayers, however — including a swath of financial advisors and their clients — may not be eligible.
“The Tax Cuts and Jobs Act of 2017 eliminated the itemized deduction for unreimbursed employee business expenses, through 2025,” says Genevia Fulbright, president of Fulbright & Fulbright, a certified public accounting firm in Durham, North Carolina. “Therefore, for 2020, W2 employees are not able to take home office deductions or deductions for unreimbursed expenses necessary to perform services for their employer,” she says.
But there is a possible workaround under current tax law for such employees.
“Employers can reimburse their employees tax-free for those expenses, with the employer taking a deduction on its tax return,” says Ryan McKeown, senior vice president at Wealth Enhancement Group in Mankato, Minnesota. “Employees who are paying out of pocket for work expenses can discuss being reimbursed by their employer for office supplies, desks, computers, monitors, phones, etc. that they had to purchase to do their job.”
Going forward, McKeown expects many employers will develop tax-free employee benefit programs for legitimate job-related expenses related to home offices in the future, to attract and retain quality workers.
He adds: “Employees can negotiate for company reimbursement. Anything they would normally need in an office would be fair game for a home office.”
‘Gig’ advantage
Alternatively, self-employed individuals, entrepreneurs, gig workers and independent contractors have traditionally been able to legitimately deduct home office expenses. Partners in a partnership and S corporation shareholders might also legitimately deduct home office expenses, under some circumstances.
For such workers, “To qualify for a home office deduction,” says Joe Bublé, partner in the New York City office of accounting and advisory firm Citrin Cooperman, “the office must be the principal place of business; a place to meet patients, clients, or customers; or a separate structure not attached to the home. It must be used exclusively and regularly to conduct business.” The deductions could be 100% of direct expenses or a percentage of indirect expenses.
Bublé, who leads the firm’s tax practice, points out that a simplified method also is available, permitting a deduction of $5 per square foot, for up to 300 square feet.
According to McKeown, direct expenses attributable to a home office can be deducted as a normal business outlay without allocating between home and work.
“That might include purchasing equipment to run virtual meetings throughout the day, extra lighting, office supplies, printers, and furniture such as desks or chairs,” he says. Fulbright cites other possible WFH deductions, including any business-related repairs and costs to reorganize space for efficiency as well as expenses incurred for exploring new business lines or enhanced technology due to a need to increase revenues.
Beyond deductible direct business expenses, a reasonable portion of overall household costs might be deducted as indirect expenses. “Examples could include utility bills, which could rise if someone is working at home all day,” says Fulbright. “Higher costs also might be incurred for water, electricity, gas, and possibly trash removal.”
Such clients who were working from home in 2020 should calculate the square footage of their dedicated office space, McKeown explains. “Home expenses such as property taxes, mortgage interest, and insurance, may be proportionally deductible if taxpayers measure and create documentation,” he says. “Someone who is audited won’t want to have to try to remember how he or she came up with the square footage used for the home office.”
McKeown adds that a time-and-space allocation would come into play if someone was starting or ending a business. A client whose qualifying home office use began with nine months in 2020 might calculate, say, 8% of home square footage in the office and deduct 6% (9 of 12 months = 3/4 of a year times 8%) of relevant payments for business use of home expenses.
Remote relief?
Other tax benefits might be available to some clients — and certain advisors — who are working from home outside select local jurisdictions. “New York City, for example, has a 4% unincorporated business tax,” says Nishant Mittal, senior vice president at Topia, a San Francisco-based HR tech company specializing in global talent mobility.
Mittal gives the example of a New York unincorporated business with some people who are now working outside the city limits. “This firm could allocate a part of its profits away from NYC and avoid paying the 4% tax,” he says, “but the firm needs to be aware of where its employees are working each day.” Individuals subject to NYC’s UBT also might benefit if they now work elsewhere.
Similar savings may be found in other local jurisdictions with this type of tax, Mittal continues, naming Seattle, San Francisco, and Los Angeles.
Randy Blaustein, an attorney who heads the New York accounting firm of R.B. Blaustein, notes that the UBT is imposed on any individual engaged in any trade, business, profession, or occupation wholly or partly carried on within New York.
“It would make sense that if you work outside of New York, then you are not subject to UBT,” he says, “but I am reasonably sure that the NYS Department of Taxation and Finance, which conducts the audit, will take a contrary position.”
Advisors can inform clients of possible tax-reduction tactics and leave decisions to the tax pros. Meanwhile, advisors’ own tax planning may encourage home office enhancements.
“For financial planners, because we are doing so many meetings virtually these days, having a good background is key,” says McKeown. “That might mean painting walls or adding bookshelves, etc., to make the space more aesthetically pleasing and professional.”
If those efforts turn out to be tax deductible, planners might do well while looking good.
