Q: Working from home and tax deductions

Because of the COVID-19 pandemic, more people are working from home than ever before. While only the self-employed are eligible for the home office deduction, it may be possible to get similar results if an employer pays or reimburses employees for these expenses.

Some possible scenarios

Employee expenses paid or reimbursed by an employer may be deductible by the employer and excludable from the employee’s income, As long as certain requirements are met. This is the case, for example, if expenses are reimbursed through an “accountable plan.” Under these plans, reimbursed expenses must have a business connection and employees must substantiate the expenses with receipts, canceled checks or other documentation.

In addition,  employees must be required to return any excess reimbursements within a reasonable time. If a plan isn’t accountable, expense reimbursements are treated as wages, subject to income and payroll taxes.

Another possibility is for an employer to treat these reimbursements as disaster relief payments under Internal Revenue Code Section 139. It appears that the COVID-19 pandemic qualifies as a disaster, allowing employers to take advantage of this provision.

IRC Sec. 139 permits employers to make tax-free payments to employees affected by a federally declared disaster, subject to certain requirements. An employer may pay “reasonable and necessary” expenses incurred by employees as a result of the disaster.

This may include home office expenses as well as certain non-job-related expenses, such as health and dependent care costs. Qualifying payments are fully deductible by the employer and excludable from the employee’s taxable income.

Do your analysis

Were you required to spend a significant portion of this year working from home? If so, and if you incurred substantial expenses to make remote work possible, do your homework to determine whether you qualify for any of these tax breaks. We can help with this determination.