Home-office tax deduction? Not so fast

Andrew Maykuth
Philadelphia Inquirer

Millions of Americans are working at home during the coronavirus pandemic. You’ve created a nice backdrop of books, awards and knickknacks to impress your colleagues during Zoom conferences. You’re also paying for the utilities and internet service you need to do your job for your employer.

That mean you must qualify for a home office tax deduction, right?

Don’t get your hopes up about that tax break, said Arthur Zatz, a tax attorney in Isdaner and Co., a Bala Cynwyd accounting firm.

The Tax Act of 2017 eliminated a lot of individual tax breaks, including the home-office deduction for employees.

Self-employed people can write off some home office expenses – many freelancers were already taking a home-office deduction before the coronavirus. But the Tax Act of 2017 eliminated a lot of individual tax breaks, including the home-office deduction for employees, Zatz said.

But there’s a glimmer of hope for employees.

Tax experts say there is a little known tax-free way for employers to reimburse workers for costs during a disaster that normally would not be eligible for reimbursement. That might include child care, commuting costs or even funeral expenses for COVID-19 deaths. It’s getting a lot of online discussion these days by tax professionals.

The 2017 Tax Cut Act dramatically increased the standard deduction to $12,000 for individual taxpayers ($24,000 for joint-filers). But it eliminated a lot of deductions, including unreimbursed employee work expenses. The aim was to simplify tax preparation: About 46 million taxpayers itemized deductions in 2017. Fewer than 17 million itemized in 2018.

If you’re an employee, the home office deduction is no longer an option.

Many self-employed workers already deduct costs for home offices. Some self-employed people who work in offices that are shut down because of the coronavirus lockdown may want to explore deducting costs of working at home, tax professionals say.

If you are self-employed, you can deduct the business part of your home used exclusively and regularly for trade or business purposes, according to H&R Block. The business part of your home must be either your main place of business, the place where you meet or deal with customers, or a separate structure that you use in connection with your trade or business.

A member of a partnership or of a limited liability company that’s taxed like a partnership might be able to take some out-of-pocket costs against income from the partnership or LLC, Evans said.

Under a law called the Stafford Act, employers can provide tax-free assistance to employees during a disaster. Typically, this is a localized event such as a hurricane. The pandemic is a nationwide emergency, so a multitude of employers might reimburse some employee expenses.

“A number of our clients have taken advantage of it for specific situations,” said John E. McGrady III, a CPA and tax lawyer at the Buchanan Ingersoll and Rooney law firm in Pittsburgh, who wrote a recent blog post about the tax provision.

Section 139 allows employers to reimburse employees for additional expenses they incur because of the emergency. A company could reimburse somebody for the cost of installing high-speed internet in their home, or a personal computer, a printer, or office supplies. They can be any “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster, McGrady said.

The tax-free reimbursements are not restricted to employees working from home. A company could reimburse an essential employee for additional childcare costs they incur because they need to work, or additional commuting cost they have to pay because public transit is not available, McGrady said. An employer could reimburse a worker for cleaning costs or additional laundry costs.

Documentation is also relaxed: “Individuals are not required to account to their employer for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred,” McGrady wrote in his blog post.

There are limitations. The employer can’t pay employees for expenses that would be covered by insurance.