by Alan Shevins, CPA

As a result of social distancing and stay-at-home-orders, many of us are now working from home.  It seems reasonable that we should at least get a tax break for our office costs.  But Congress has been narrowing eligibility for this deduction by increasing qualification thresholds and in 2018, eliminating the miscellaneous itemized deduction altogether.  So what’s an honest taxpayer to do?

The solution generally takes two paths.  Businesses can still deduct home office costs when the expenses are paid directly by the business.  So for costs such as supplies, equipment & cleaning costs, request that your Company pay them directly.  While that can work well for most small businesses, larger companies often do not accommodate direct payment.  This more typical situation can be solved by having the business implement an Accountable Plan.  The IRS allows the business to reimburse workers for business expenses incurred (in this case, home office expenses attributable to the business use portion of your home).  The plan can reimburse both direct costs (discussed above) as well as a pro-rata share of other housing costs such as taxes, interest, utilities, & depreciation for home office space used regularly and exclusively for business.  The business will deduct the home office costs and the worker receives reimbursement that is tax free;  problem solved.

Of course, workers must still meet IRS requirements for the deduction but with work from home orders in place, suddenly many of us now qualify where we previously did not.  That’s because our homes are now our principal (if not only) place of business.  Any space in the home used exclusively for business use may now qualify for the deduction.  The accountable plan rules have strict documentation requirements that must be followed.  You can use Form 8829 as a template to calculate the office costs that qualify.

It is advised that the accountable plan terms are reduced to writing.  Be careful drafting the plan as only costs that are both covered and reimbursed under plan terms will qualify.  In our experience, this is one of the few areas where the IRS will ask to visit your home in an exam setting—tape measure in hand.  The IRS may also call the business to request the accountable plan document and inquire about Company policy!  We have prepared and defended home office deductions and may serve as a resource if needed.