By: William L. Bricker, Linda Galler & Inhyuk Yoo
As the business world recovers from the pandemic, many employers are choosing to retain remote work arrangements. This raises questions about the tax deductibility of costs associated with maintaining offices in homes. Unfortunately, until at least 2026, employees are not permitted to deduct their home office costs. However, employers who reimburse employees for the costs of maintaining offices in their homes may be able to deduct amounts paid to reimburse such employees, who then would not be taxed on the amounts they receive.
Home Office Deductions Unavailable to Employees
Understanding how this could work requires some knowledge of Section 280A of the Internal Revenue Code (the “Code”), which allows deductions for expenses associated with the business use of a home only if all three of the following requirements are met:
A specific area in one’s home (e.g., a room or other separately identifiable space) is used exclusively for trade or business purposes. If, for example, work is conducted in a corner of one’s den, there can be no deductions under Section 280A.
This area is used regularly for business purposes.
The home office must be either one’s principal place of business or used as a place to meet or deal with patients, clients, or customers.[1]
Prior to the passage of the Tax Cuts and Jobs Act (“TCJA”) in 2017, employees who worked exclusively from home were permitted to deduct their unreimbursed home office expenses as miscellaneous itemized deductions if the three requirements were met.[2] The TCJA, however, suspended most miscellaneous itemized deductions for unreimbursed employee business expenses, including home office expenses, until 2026.
A Viable Alternative – Accountable Plans
Fortunately, there is a tax-attractive alternative: employers can reimburse employees for costs associated with their home offices under an “accountable plan.” Under an accountable plan, employers can deduct as trade or business expenses the amounts paid to employees as reimbursement for home office costs. Also, the amounts received by employees can be (i) excluded from their gross income, (ii) not reported as wages or other compensation on Form W-2, and (iii) exempt from withholding and payment of employment taxes, including FICA.
To constitute a valid accountable plan, all three of the following requirements must be met:
Expenses that are reimbursed under the plan must have a business connection. Qualifying expenses may include expenses relating to the business use of an employee’s home, such as a portion of the home’s mortgage interest, real estate taxes, utilities, home insurance, etc. Importantly, the employee’s use of his home under an accountable plan must satisfy all three requirements of Section 280A, discussed above.
Expenses must be substantiated by the employee within a reasonable period.
The employee must be required to return to the employer any money that is received and not spent on reimbursable expenses.
A plan that fails to meet any one of these conditions is considered a “nonaccountable plan” and is not eligible for the benefits described. Thus, while an employer might be permitted to deduct amounts paid to employees as reimbursement, amounts received under a nonaccountable plan are included in the employee's gross income, must be reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and payment of employment taxes.
Accountable plans provide benefits to employees who chose, or are required, to work at home. Tax deductions to employers reduce the cost of reimbursements to some degree. Since all of the requirements discussed above must be met to obtain employee tax savings, documentation of a plan, strict adherence to its terms, and good recordkeeping are recommended.
[1] Individuals with access to office or workspace within a company’s business premises generally does not meet the principal place of business requirement but they still can satisfy the requirements of Section 280A if they actually meet with patients or clients in their homes. [2]These deductions were allowed to the extent that they exceeded 2% of adjusted gross income.