The Tax Cuts and Jobs Act now in effect for 2018 no longer allows for employee1 home office deductions. This is a significant tax change that, according to the IRS, adds up to billion lost deductions, and increased taxes for over ten million taxpayers. The complete elimination of deduction of employee business expenses is one of the major changes of the new tax law.
There is a workaround. Employers who require employees to work from home should set up an ‘accountable plan’2 for employee home office expenses so that employees can pay for these expenses on a tax-free basis and not as an after-tax expense from net wages. The earlier in 2018 that this is considered, the greater the possible tax savings.3
As an example: assume an employee with $100,000 gross wages formerly deducted $5,000 in home office expenses in order to reduce here income tax expense by $2,000 per year. In 2018 this deduction is no longer allowed. As an alternative, the employer could arrange to pay the employee $95,000 wages plus a $5,000 home office expense reimbursement through an accountable plan. The employer and the employee both save in taxes. The employer’s saving might also include a reduction in other taxes and wage-based expenses for a total savings even larger than previously available through the employee’s home office deduction.
From a practical approach, it makes sense to reconsider the design of the company’s entire employee benefit plan and not just the home office reimbursement feature. There are likely other areas where redesign would lead to tax savings for the employer and the employees.
I would be pleased to speak with an employer representative about the design, implementation and administration of this strategy. The discussion typically starts with a projection of costs and benefits for both the employer and employee and then moves to consideration of how to best incorporate the new feature into the existing payroll accounting system.
1 The change affects employees only. The change does not apply to self-employed persons, however the same strict limitations on home office deductions for self-employed persons were already limited by IRC 280A remain in effect. In summary, the home office must be used as the exclusive principle and regular place of business or to meet with customers and must not be used for personal purposes.
2 Freedom Benefits small business benefit plans now include this as an option available to sponsoring employers. This service offered by me and affiliated adviser firms gives simple and affordable flexible employee benefit plans to employers with fewer than 50 employees.
3 Despite lots of coverage of this issue in business media late in 2017, it appears that many taxpayers are not aware of the tax law changes affecting itemize deductions. See “What Your Itemized Deductions On Schedule A Will Look Like After Tax Reform” by Kelley Phillips Erb in Forbes, “10 Tax Deductions That Will Disappear Next Year” in US News and “Tax reform: 9 tax deductions are going away in 2018” in USA Today. Casual online discussions among tax advisers indicates this topic and the ‘workaround’ solution is not among the topics that is typically discussed in c planning for 2018.