William Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business
The office in home deduction is out of touch with the realities of our COVID-19 world. The restrictions on deducting home office expenses were intended to prevent taxpayers from deducting personal expenses of a home for minimal work performed there. However, in a COVID-19 world, workers are staying home to comply with safety orders and to protect themselves, not to create deductions, and the current tax rules make legitimate deductions related to working from home difficult or impossible. TXCPA wrote to Congressional leaders to encourage greater availability of the home office deduction during the pandemic.
To limit the home office deduction to only the most meritorious cases, Section 280A requires that the office must be regularly and exclusively used as a principal place of business or as a place to meet with patients, clients or customers in the normal course of business. In addition, home office deductions are limited to the income from the activities in the home office. To the extent that depreciation is taken on a home office, there are potential problems of basis adjustments and depreciation recapture when the home is sold. For employees, the Tax Cuts and Jobs Act eliminated the home office deduction altogether after 2017. Finally, the IRS closely scrutinizes claimed home office deductions. (See IRS Pub 587 Business Use of Your Home and Instructions for Form 8829.) These limitations make legitimate home office deductions impossible for many home office workers during the pandemic.
Various government shelter-in-place, stay-at-home and work-safe rules have caused millions of taxpayers to work from home during the pandemic. A Gallup poll at the end of April showed 63% of U.S. employees said they had worked from home in the past seven days because of coronavirus concerns, a number that had doubled from 31% three weeks before. These individuals have home expenses related to their work that are generally not reimbursed and that fairly should be deductible. Even when COVID-19 subsides, workers may be reluctant to return to offices for some time because of lack of adequate social distancing and other protections.
TXCPA wrote a letter to Congressional leaders to recommend that the requirements to take an office in home deduction be relaxed for 2020 as follows:
- Employees and self-employed individuals should be allowed an above-the-line deduction for a home office.
- The current requirement that the home office be the principal place of business should be temporarily removed.
- The current requirement that the home office be used exclusively for business should be temporarily removed.
TXCPA provided reasons for these recommendations. Many individuals cannot work at their former principal place of business during the pandemic and may not be able to do so for some time after the virus subsides. They meet virtually rather than in-person in an office. These remote workers may not have the space for a separate office in the home that satisfies the “regular and exclusive use” requirement. Workers have additional direct and indirect costs of maintaining an office in home that should fairly be deductible. If these changes were made, home workers would be able to use the simplified method for claiming home office expenses that would provide some fairness with a minimal deduction that avoids much of the complexity of a regular home office deduction.
Simplified Home Office Deduction
The home office deduction is often avoided because it can be complex and draw IRS scrutiny. The simplified method of claiming an office in home deduction is an alternative to the regular method. The deduction calculation is simplified, and substantiation and allocation of actual expenses are minimized. The deduction is limited to a maximum of $5 per square foot for up to 300 square feet per year, pro-rated by months of use as an office. This is in lieu of actual home expenses and avoids complexities of depreciation, basis reduction and potential depreciation recapture on sale of the residence. It also does not reduce deductions for home mortgage interest and real estate taxes, so allocation problems are avoided. This might encourage many more taxpayers to take an office in home deduction. For more information about the simplified method, see IRS Revenue Procedure 2013-13.