It is a truth universally acknowledged that a home office deduction ("HOD") remains one of the main triggers for a tax audit… And yet, with so many of us working from home in 2020, the home office deduction is most likely to make an appearance on most returns… or is it?
A friend who, like many of us, spent most of 2020 working from home, asked the Trotter pointedly at the virtual New Year’s Eve party "what is going on with the home office deduction?" Her accountant informed her that those of us employed by others cannot deduct home office expenses. The Trotter suggested that she pour herself another glass of bubbly because the 2017 Tax Cuts and Jobs Act (TCJA) indeed took the HOD away from employees. One could argue that a $500 reimbursement limit for home offices expenses set by many employers is a rough cash tax savings equivalent of a $1,500 deduction allowed to those of us who are self-employed under the simplified HOD method. If you are not fortunate to work for a company which grants you any sort of home office allowance or if your set up expenses exceeded your allowance, you are out of luck! Consider it your very own payroll protection investment. If you work and, therefore, are subject to tax in New York or Pennsylvania, you may be able to claim the office deduction as an employee but if you work in Connecticut, Massachusetts, New Jersey or elsewhere in the North East, you are out of luck (the out of luck group includes the residents on New Hampshire who Massachusetts is aiming to tax based on the fact that their regular place of employment/employer is in Massachusetts). California, the state with the highest income tax rate, also allows HOD for employees.
One would think that employees forced to purchase additional equipment and burn the proverbial midnight oil at their homes should be allowed at least some access to the home office deduction as the self-employed. Due to the pandemic they no longer have the option of accessing their employer’s resources and space, nor could they have their employer direct-ship them supplies such as printing paper and pens to replenish their stock just in time before it runs out. And the Trotter is not aware of employers reimbursing employees for a portion of their rent or mortgage or electric bills. Of course, if you are aware of such generous arrangements do let the Trotter know at email@example.com.
The U.K., on the other hand, allows relief for employees who have no option but to work from home, including because of the pandemic. The employees could claim £6 (appr. $8) a week from 6 April 2020 (for previous tax years the rate was £4 (appr. $5.4 a week) and not need to keep evidence of their extra costs to support this flat rate deduction. This would bring the flat rate HOD to appr. $416 for 2020. The employees are also allowed to deduct the exact amount of extra costs the employees incurred above the weekly amount but will need evidence such as receipts, bills or contracts. These additional expenses include heating, metered water bills, home contents insurance, phone charges for business calls or a new broadband connection. They do not include costs that would stay the same whether the employees were working at home or in an office, such as mortgage interest, rent or property tax. The employees may also be able to , such as a laptop, chair or mobile phone. See Claim tax relief for your job expenses: Working from home.
Canada also allows employees to claim HOD if they:
- worked from home in 2020 due to the COVID-19 pandemic or employer required them to work from home,
- worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020, and
- incurred expenses used directly in their work.
Employees could use a temporary flat method or the detailed method to claim HOD. Under the temporary flat method, employees can deduct $2 for each day they worked from home during that period plus any additional days they worked at home in 2020 due to the COVID-19 pandemic. The maximum employees can claim using the new temporary flat rate method is $400 (200 working days) per individual – that’s appr. US$314. The temporary flat method works a lot like a standard deduction – if you use it, you cannot itemize any of your employment expenses.
Under the detailed method, all employees could deduct itemized expenses they’ve incurred such as electricity, rent, heat, water, internet access, maintenance and minor repair fees and rent allocated to the home office space. Commission employees, as opposed to salaried employees, could claim additional expenses such as property taxes, home insurance and office equipment lease costs. The following expenses are not deductible: mortgage interest, principal mortgage payments, home internet connection fees, furniture, capital expenses (replacing windows, flooring, furnace, etc.), wall decorations, cost of cell phones and other office equipment, basic landline access rates. The employees must also comply with certain documentation and filing requirements including having their employers certify their employment conditions on form T2200 or T2200S (shorter certification created especially for the pandemic). Form T2200 certification is not required to support the flat rate deduction. See Simplifying the process for claiming a deduction for home office expenses for employees working from home due to COVID-19.
The Trotter wonders whether the next round of COVID-related stimulus legislation would include a HOD for employees. Some may argue that any additional expenses incurred on setting up and maintaining a home office are being offset by reduced costs of commute and employer allowances. For most suburban commuters in high cost of living areas, this could be true – for example, the Trotter is saving approximately $400 a month by not having to pay for her Metro-North monthly pass as well as her NYC subway pass. But even if the commuter savings v. HOD argument holds at the federal level, the high and gross tax states which currently do not allow HOD should consider it as one of their anti-migration measures. Because unlike the federal government they must compete with Florida and Texas and Colorado.