Independent contractors can deduct a home office, and any pandemic-era upgrades probably can be deducted too. There are two ways to calculate the tax amount.
Struggling to teach a Zoom class from home this fall or working remotely on a project launch while your own children are home 24/7 seem like patriotic duties that should at least come with a tax break.
Shouldn’t someone be able to write off a few extra expenses like electricity or high-speed internet when fighting the spread of COVID-19 by working from home all the time? Shouldn’t working from home for six months or possibly more in 2020 account for some kind of tax break?
Short answer: Well, you probably are not going to like what you hear.
Many people are asking questions about potential tax breaks for home offices these days, as more office workers continue to juggle their lives and jobs from home.
While General Motors might consider bringing back some workers to the office in the fall, for example, the majority of GM white-collar workers could continue working remotely through year-end, according to the company’s latest plans.
Unfortunately, if you’re working for someone else, say you’re an employee of a school district or automaker, the tax rules don’t allow you to claim a home office deduction for unreimbursed business expenses relating to working from home. No such tax deduction is available for W-2 wage earners who are dealing with unreimbursed business expenses, according to James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, Michigan.
Oddly enough, some remote employees would have had more options under the old tax rules if their unreimbursed business expenses, including the cost of a home office, exceeded 2% of their adjusted gross income. One rule then: You had to be required by your employer to work remotely, and not just doing it for your convenience.
But that tax break won’t work anymore due to changes in the Tax Cuts and Jobs Act of 2017. After 2018, the new tax law prevents employees from deducting unreimbursed expenses that they incur for their jobs.
“There is no deduction for an employee working out of their house. That went away with the Trump tax cuts,” said George W. Smith, a CPA with Andrews Hooper Pavlik in Southfield, Michigan.
Another key point: You can no longer deduct expenses related to finding a new job, either.
Even so, some people might be able to take advantage of a few tax breaks. Here’s a look at some possibilities depending on your situation.
Self-employed or independent contractors
If you are self-employed or an independent contractor, you can claim a home office deduction. These expenses do not need to exceed 2% of your adjusted gross income but you’re going to need to meet other tight rules.
You need a space whose “regular and exclusive use” is for business. See IRS Form 8829 , which you would file with Schedule C.
“If you are self-employed, you were always eligible to claim business use of home as a deduction,” O’Rilley said. “What may be new for those individuals is with more time spent at home many people have ‘invested’ more into their home offices – build-outs, new furniture, increased internet capabilities, copiers, printers, scanners – all which would be eligible for immediate expensing,” O’Rilley said.
When it comes to many build-outs, though, such as adding a back room onto your home, you would not get a deduction if that construction is a structural improvement to real estate, he said.
If you were an independent contractor who went to a job site but now work from home in the pandemic, you can claim the home office deduction for the time you’re working remotely. But keep records of when you began working from home and your expenses.
Two methods exist for claiming the deduction: You’d claim a percentage of expenses – such as mortgage or rent, utilities, real estate taxes and homeowners’ insurance – based on what percentage of your home is used for your business.
If 5% of your home is used for business, you’d take 5% of those expenses. This method demands more records and receipts.
Or the IRS has a simplified method where you could take a maximum deduction of up to $1,500 based on the square footage of your home office multiplied by $5. The maximum allowed is up to 300 square feet for business use of the home, if using this method.
Whether they’re holding online classes or teaching in the classroom, teachers continue to receive a deduction of up to $250 for unreimbursed business expenses for classroom materials, such as books, supplies, computers including related software and supplementary materials that you use in the classroom.
If both spouses are teachers, the deduction can be up to $500 on a joint return.
The tax break applies to those who teach kindergarten through grade 12. This tax break does not apply for pre-school teachers or college instructors.
Although the statutory language states that the equipment and materials must be “used by the eligible educator in the classroom,” most tax experts believe that this language could apply to a virtual classroom as well as a physical one, according to Wolters Kluwer Tax & Accounting.
Going remote at a condo in another state
Those fortunate enough to choose to work from a lake home in another state could face a few more tax twists. Or maybe not, depending on the tax rules for those states.
Working out of your condo in Florida, if you live in Michigan, isn’t likely to cause tax headaches since Florida doesn’t have a state income tax.
Michigan also has reciprocity agreements with neighboring states, like Ohio, so there’s no issue there, O’Rilley said. Michigan has reciprocity agreements with Illinois, Indiana, Kentucky, Minnesota, Ohio, and Wisconsin.
But some other states, including New York, will tax income earned in that state even if the person primarily resides and works in another state. Much will depend on how tax rules are worked out in the months ahead. But working remotely elsewhere could mean that you end up having to file two state income tax returns and the arrangement could trigger higher taxes overall, depending on the states.
Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting, said 14 states – Alabama, Georgia, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, Rhode Island, South Carolina, and Vermont – and the District of Columbia have enacted a specific COVID-19 exception.
Those states generally won’t tax workers who have made a temporary move there because of the pandemic, but state policies can vary.
Congress is also considering legislation to address the issue as it relates to the pandemic, which might change the rules. Luscombe noted that the Senate proposal as part of its HEALs bill states that only the state of residence can tax the income during this period, so there’s some concern that some states, like New York, could lose revenue.
Eileen Sherr, senior manager for tax policy and advocacy for the American Institute of CPAs, said state CPA groups should consider advocating that state taxing authorities allow the employee who is temporarily telecommuting to continue to pay tax to the state where the employer is located, not where the employee is sheltering in place during the pandemic.
“This treatment would help prevent a double tax where one state uses the convenience of employer test to source wage payments and the other state uses the physical presence standard,” Sherr said.
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