Do you have any employees who work from home? If you understand the tax rules they face for claiming a home office deduction, you can help them. A home office deduction enables a person to treat otherwise personal costs as a deductible business expenses. The deduction can be based on the actual costs allocated to the portion of the home used for business or on an IRS-set allowance of $5 per square foot up to 300 square feet (a maximum deduction of $1,500). The employee claims the deduction as a miscellaneous itemized deduction on Schedule A of Form 1040.
An employee working from home can qualify for the home office deduction only if he or she meets the following three tests:
- First, the home office must be the principal place of business or a place to meet regularly with customers, clients, or patients.
- Secondly, the space must be used regularly and exclusively for business. The space cannot be used for personal purposes when not being used for business (so a kitchen or den won’t qualify).
- Third, the use of the home office must be for the convenience of the employer and the employee does not rent the space to the employer. (This last applies only to employees and not to self-employed individuals working from home).
An employee who opts to work from home for family reasons or because he or she believes one can thus be more efficient may not be eligible for a home office deduction. The choice must be the employers. Thus, an employee who finds it helpful and appropriate to do work in the evening at home usually can’t take the deduction. If an employer requires an employee to work from home—all the time or at certain times—the employee may be eligible for the tax break. Working from home must be a condition of employment, necessary for the employer’s business to function properly, or needed to allow an employee to perform his or her employment duties.
Situations where the use of a home office can be for the convenience of an employer include:
- The employer requires an employee to work from home because there is no office space for the worker.
- The office is locked at the end of the business day but the employer requires an employee to do work (e.g., be on call to answer customer questions) after hours or on weekends and holidays. An employer's requirement for an employee to work at home should be supported by a letter to the employee detailing the responsibilities and the necessitating conditions.
If the employee charges the company rent for a home office, the deduction is forfeit. If you are the owner-employee of an S corporation and work from home, you can’t charge the corporation any rent if you want to take a home office deduction. You must report the rent as income, and the corporation can deduct the rent payment, but you can’t take a home office deduction.
A Better Plan
While it’s great to help an employee get a home office deduction, it might be worth little or nothing to the employee. The employee must itemize to take the deduction. If he or she does itemize, only miscellaneous itemized deductions over 2% of adjusted gross income are actually deductible. An employer can eliminate the need for a home office deduction by reimbursing the employee’s home office expenditures through an “accountable plan.” In such a plan, reimbursements are not treated as employee compensation and no employment taxes are required. You can still deduct your reimbursements.
- To be treated as an accountable plan, the following conditions must all be met:
- The expenses must have a business purpose and be paid or incurred while performing services as an employee. Thus, paying an employee’s home office costs must reflect company policy.
- The employee must submit costs to the employer within a reasonable time (usually within 60 days after the expense is paid or incurred).
- If the company advances payments, the employee must return any excess reimbursement within a reasonable time (usually within 120 days after the expense is paid or incurred).
- Reimbursements must be limited to actual business costs of the employee, such as charges for Internet access. Reimbursements under an accountable plan cannot include payments for personal expenses.
While the tax law doesn’t require any special type of written plan, it’s highly advisable to craft your own. Be sure that it contains the elements of an accountable plan and that the working-from-home arrangement is reflected in the document.
Companies increasingly offer telework opportunities to employees. A recent study found a 30% increase in telecommuting job listings from 2014 to 2015. Helping employees with a plan that accommodates tax and reimbursement concerns will improve employee satisfaction. The home office deduction is explained in IRS Publication 587. Requirements for an accountable plan are in IRS Publication 463.
Barbara Weltman is an attorney and writer who frequently contributes to the SBA blog