Thirty years ago, when I was a real accountant (haha), January was one of the most hectic months of the year. The preparation of annual payroll tax returns marks the quiet beginning of tax season. You should now start to receive W-2’s, 1099’s, and other tax forms to be set aside for the preparation of your 2020 individual income tax return. Many of our regular readers are now working from home on either an intermittent or permanent basis. For those of you in this category, you may be able to take advantage of the employee home office deduction.
In the past, the standards for deducting home office use have proven notoriously prohibitive. Pursuant to the 2018 Tax Cuts and Jobs Act, requirements for W-2 wage earners clearly stipulate that for its costs to qualify, a given home office must:
- Be used at the convenience of the employer
- Constitute a specifically allocated area used expressly for work-related purposes and
- Have space for storing work-related materials.
There are of course numerous other requirements, but historically these have proven sufficient barriers for many remote employees. But since the advent of COVID-19, two novel legislative pathways have opened up:
- Section 139 (Disaster Relief Payments) and
- Section 165 (Losses)
The primary purpose of this blog post is to briefly discuss both of these two sections of the Internal Revenue Code.
Section 139 (Disaster Relief Payments)
Section 139 provides that any funds an individual may receive as Qualified Disaster Relief Payments cannot be included in their annual Gross Income. By this rule, when a business owner reimburses an employee for the costs of their home office, those reimbursement funds need not be included in his or her income. Employers are thus correspondingly exempt from reporting any such payments on either Form W-2 or Form 1099. In fact, they themselves may deduct these amounts as Section 162 Ordinary and Necessary Business Expenses. Crucially, Section 139 further provides that to qualify as such, Disaster Relief Payments need not emanate strictly from governmental sources. According to the IRS, qualifying funds include “any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” Section 139’s clarity and scope have made it the broadly preferred pathway to reimbursing employees for their home office expenses. But if its parameters do not fully encompass their particular circumstances, employees have an alternative option: Section 165 (Losses).
Section 165 (Losses)
Under Section 165, “any loss occurring in a disaster area and attributable to a federally declared disaster may…be taken into account for the taxable year immediately preceding the taxable year in which the disaster occurred.” As the COVID-19 outbreak was declared a National Emergency on March 3, 2020, the terms of this provision firmly qualify it as a federally declared disaster. Any employees who might have been forced to shoulder the costs of a home office could therefore report those costs on Form 4684 (Casualties and Thefts). It is notable however that any deduction thus awarded would be reduced by the $500 Qualified Disaster Loss Subtraction. Wage-earners should likewise consider that the deductible loss would be carried forward to Schedule A (Itemized Deductions), where it would be added either to the standard deduction, or any other itemized deductions they may have.
No doubt many remote employees will be eager to take advantage of these opportunities. But to avoid any future complications, it is necessary to carefully review Form 8829 (Expenses for Business Use of Your Home)’s calculation instructions. When completing this form, wage earners should consider the cost of computers, office equipment, furniture, and other work support materials. Certainly, COVID-19 has posed significant complications to many employees’ potential tax outlooks. It is possible that some will require professional guidance to navigate the newly relevant paperwork.
To find out more how COVID-19 may affect your 2020 income tax return please consult your tax advisor. You may also find other blog posts from our firm to be of assistance.