MAKING CENTS: What about work-from-home expenses?
In these days of working from home, questions about deducting expenses for maintaining an office in your home arise. There are now two sets of rules in the Tax Cuts and Jobs Act passed in late 2017, effective 1/1/2018. One set of rules applies to employees and one for self-employed people and partners in a partnership.
If you’re an employee of a company, whether you own it or not, you can no longer deduct expenses for the use of your home under some very strict guidelines since 1/1/2018. This holds true even if your employer requires that you maintain an office in the home.
Any reimbursements that are received from your employer for bona fide expenses for the office in your home are also considered taxable unless your employer established what the IRS calls an ‘accountable plan.’ Under an accountable plan, employers must require employees to document and substantiate any such expenses applied for reimbursement and the plan must further state that the employee has the responsibility to return expense reimbursements that cannot be verified and documented.
For an employer’s accountable plan to be effective, three criteria must be met.
The expenses must have a business purpose. They must be documented within a reasonable period and any excesses must also be returned within a reasonable period.
Noncompliance with any one of the criteria can disqualify your reimbursement as tax free and cause it to become taxable. If your company lacks an accountable plan, get one immediately so you don’t send any tax problems down to your employees.
According to the Journal of Accountancy, if you are self-employed or a partner in a partnership, to be eligible for a home office deduction, the dwelling unit must be one of the following: The principal place of business; a place to meet patients, clients, or customers in the normal course of business; a separate structure not attached to the dwelling and used in connection with the business; or if the dwelling is the only fixed location of the taxpayer’s business, a space within it that is used regularly to store the business’s inventory or product samples.
Direct expenses, such as painting the area used for business or furniture used in the home office area may be fully deducted. But what are called indirect expenses, expenses that you may have with or without the business in the home you would need to pro-rate the business and personal portions of the allowable expenses. Examples of indirect expenses would include taxes, mortgage interest, insurance, repairs, and depreciation. Some other indirect expenses may not offer any deduction. Any utilities or services not used in the business would not qualify at all. Examples of these may include landscape services or your first phone line. Expenses such as cable TV or internet services may be included as long as you can show that these expenses are ordinary and necessary to the successful operation of your business.
John P. Napolitano CFP®, CPA is CEO of U.S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.