According to recent statistics, 3.7 million employees, accounting for 2.8% of the workforce, now work from home at least half the time. This represents a 103% increase in work-at-home employees since 2005. If your business has remote employees, it’s important to understand the tax rules they face for claiming a home office deduction and how you can support them.
### Overview of the Home Office Deduction
The home office deduction allows individuals to treat certain personal costs as deductible business expenses. The deduction can be calculated based on the actual expenses allocated to the business portion of the home or an IRS-set rate of $5 per square foot, up to a maximum of 300 square feet, resulting in a maximum deduction of $1,500. Employees claim this deduction as a miscellaneous itemized deduction on Schedule A of Form 1040.
To qualify for the home office deduction, an employee must meet three criteria:
1. The home office must be the primary place of business or a location to regularly meet with clients, customers, or patients.
2. The space must be used exclusively and regularly for business purposes. It can’t double as a personal space like a kitchen.
3. The home office must be used for the employer’s convenience, and the employee cannot rent the space to the employer.
### Special Conditions for Employees
The third condition only applies to employees, not self-employed individuals. If an employee chooses to work from home for convenience or personal reasons, they may not qualify for the home office deduction. The decision to work from home must come from the employer. For instance, if an employee works from home in the evenings for convenience, they likely can’t claim the deduction.
However, if the employer mandates working from home, whether all the time or just occasionally, the employee may be eligible for the deduction. The home office must be a condition of employment, essential for the employer’s business operations, or necessary for the employee to perform their duties. Examples include:
– The employer mandates remote work due to lack of office space.
– The office is closed after regular hours, but the employee is required to work during off-hours or weekends.
A company policy supporting remote work can be documented in a letter to the employee. For instance, I once received a letter specifying my offsite work arrangement due to a lack of office space at my employer’s location.
### Accountable Plan
While helping an employee secure a home office deduction is beneficial, the write-off might be minimal. The employee must itemize deductions, and only miscellaneous itemized deductions exceeding 2% of adjusted gross income are deductible. Employers can bypass the need for a home office deduction by reimbursing home office expenses through an “accountable plan.” These reimbursements aren’t considered compensation and aren’t subjected to employment taxes. Employers can still deduct these reimbursements.
To qualify as an accountable plan, the following conditions must be met:
– Expenses must have a business purpose and occur while performing employment duties.
– Employees must account for costs within a reasonable time, typically within 60 days.
– If advances are given, employees must return any excess reimbursements within 120 days.
– Reimbursements should cover actual business expenses, such as internet charges, and not personal costs.
While the tax law doesn’t mandate a specific written plan, it’s advisable to create one, ensuring it contains all elements of an accountable plan and reflects the remote work arrangement.
### Conclusion
Telework opportunities are on the rise, with a 36% increase in telecommuting job listings from 2014 to 2015. Helping employees navigate the tax rules for their home office will be greatly appreciated. Detailed information on the home office deduction can be found in IRS Publication 587, and accountable plans are explained in IRS Publication 463.
