Analysis

Pandemic Raises Interest In Renewing Home Office Deduction

By Stephen Cooper
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Law360 (May 19, 2020, 4:16 PM EDT) -- With millions of Americans working from home during the novel coronavirus pandemic, interest is beginning to grow among some congressional lawmakers and the public for reinstating the deduction for home office expenses that Republicans eliminated in the 2017 tax overhaul.

Even as states begin lifting stay-at-home orders and reopening their economies, many employers are maintaining company policies that allow white-collar workers to conduct business remotely using digital platforms offered by companies such as Zoom, WebEx, Skype, Microsoft and Google.

Rather than commuting to corporate offices that lack the proper infrastructure to allow social distancing, many workers are upgrading their kitchens, spare bedrooms and hallways with makeshift workstations replete with multiple monitors, laser printers and other needed office equipment.

Unless Congress changes the tax law to reinstate the deductions for miscellaneous unreimbursed business expenses in a coming pandemic relief bill, those business-related upgrades made by employees won't be deductible on their tax returns come next April. Some lawmakers are already considering legislation to reflect more people working from home during the outbreak.

The Tax Fairness for Workers Act, or S. 1026, introduced in April 2019 by Senate Finance Committee member Bob Casey, D-Pa., would restore the above-the-line deduction for union dues and reinstate the miscellaneous itemized tax deduction for unreimbursed employee work expenses.

The bill, co-sponsored by 15 Senate Democrats as well as Sen. Bernie Sanders, I-Vt. would support Americans who are, as Casey told Law360, "struggling and sacrificing" to stop the spread of COVID-19, the respiratory disease caused by the virus.

The bill would ensure that workers "get some tax benefit in the coming years for the unreimbursed work-related expenses they have incurred, not just the super-rich and large corporations," Casey said.

Under the 2017 Tax Cuts and Jobs Act , Republicans eliminated the miscellaneous itemized deduction from 2018 to 2025, thereby raising $668.4 billion in revenue used to offset the cost of doubling the standard deduction and providing tax relief to corporations. Before that change, employees with home offices were allowed to deduct eligible work-related expenses above 2% of their adjusted gross income. Eligible expenses included legal fees, professional subscriptions, uniforms, medical examinations required by an employer, tools and job search costs.

Losing the deduction means that taxpayers with eligible unreimbursed expenses could see their tax burden increased by an amount equal to their marginal income tax rate multiplied by the amount of those expenses in a tax year, the Congressional Research Service said in a 2019 report detailing the tax overhaul.

The tax law didn't change the home office deduction for self-employed workers or independent contractors with jobs in the so-called gig economy: ride-hailing drivers, housecleaners and the like. Companies can also pay for their workers' expenses under an employer's accountable reimbursement plan that requires submission of receipts and reimbursement of unused advanced funds, the CRS report noted.

Rep. Kevin Brady, R-Texas, the ranking member on the House Ways and Means Committee, said he hates adding special new credits to the tax code after Republicans simplified it under TCJA.

However, plumbers, truckers, welders and others who have legitimate expenses above a daily per diem amount have asked Congress over the last several years to reinstate the miscellaneous deduction, Brady said during an interview on Sirius XM radio last month.

"Maybe we ought to [have] a discussion about the cost that families, or workers, had to undertake" while working from home during the pandemic, Brady said.

"I think that's worth taking a look at," he said.

The American Institute of Certified Public Accountants has also called for changes to the home office deduction to reflect the way Americans are working from home during the crisis, according to Christopher W. Hesse, chairman of the group's tax executive committee.

"The exponential rise of telework and pace of traditional working habits in response to the COVID-19 pandemic necessitates a modern approach to the home office deduction," Hesse wrote in a recent letter to Brady and other bipartisan leaders of the House and Senate tax-writing committees.

The AICPA recommended the removal of what it characterized as outdated strict-use requirements for the deduction to reflect that many Americans are using laptop computers and smartphones to conduct many aspects of their personal and working lives. The deduction can't be taken for any space where personal and business tasks are combined, Hesse wrote.

Norman Lencz, a tax partner at Venable LLP, told Law360 the price tag of reinstating the home office deduction may make it politically difficult. Six months ago, before the COVID-19 outbreak, the cost of restoring the deduction would have been much lower, Lencz said.

Now the revenue loss would be higher since "pretty much everyone is working at home and there's a possibility of this continuing for some time," he said.

Employers who reimburse workers for purchasing home office equipment may also face pitfalls under current law when the businesses try to write off the cost, Lencz said.

"If they reimburse you for a printer, or pay for your computer, it becomes a question of: Is it personal or is it business? Is the employee getting a benefit beyond using it to meet business needs?" he said.

Lencz advised that companies providing office equipment to workers who have home offices should put a policy in place that says when an employee quits, the property will be returned to the business. The policy should also clearly state that the property is intended only for work use, not for personal use, he said.

Employers must also ask whether large expenditures on behalf of an employee are truly work-related and deductible, Lencz said.

"Or, to what extent is it disguised compensation because it's really for the personal benefit of the employee?" he said. "So long as you're not abusive or egregious, it should be OK."

--Editing by John Oudens and Neil Cohen.

For a reprint of this article, please contact reprints@law360.com.

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