Please enable JavaScript to view this website.

How COVID-19 May Affect Income Tax Deductions for Working from Home

COVID-19 has forced many employees to work from home. This has presented new challenges, but also has introduced new opportunities, particularly relating to income tax deductions. This blog post will discuss how COVID-19 might affect potential deductions for employees working from home. It will do so in two parts. The first will summarize and explain the current state of income tax deductions related to working from a home office. The second will analyze how these home office expenses will likely factor into an employee’s 2020 income tax as well as discussing what employers may be able to do to help their employees (and themselves).

There are two main categories of deductions for expenses related to working from home. The first category is the home office deduction, which contains all deductions allocable to using part of a taxpayer’s “dwelling unit” (home, apartment, etc.) as their principal place of business.1 Taxpayers eligible for the home office deduction may deduct ordinary and necessary business expenses attributable to using part of their dwelling unit as a home office.2 Such deductions are usually calculated by comparing the square-footage of the home office to the square-footage of the entire dwelling unit. Dividing the size of the home office by the size of the entire dwelling unit yields a percentage. The taxpayer is then allowed to take that percentage of the total ordinary and necessary business expenses for the entire dwelling unit (including, but not limited to, rent, heat, and utilities) as a home office deduction.3 The second category includes deductions for all other “ordinary and necessary expenses” for “carrying on any trade or business.”4 First, let’s start by looking at the home office deduction.

The Internal Revenue Code allows a taxpayer to take a deduction “for a home office that is exclusively used as ‘the principal place of business for any trade or business of the taxpayer.’”5 There are three questions to ask to determine a taxpayer’s eligibility for this deduction:

(1) Is the home office the taxpayer’s principal place of business?6

(2) Is it used exclusively on a regular basis as such?7

(3) What counts as an employee’s trade or business as they attempt to claim the home office deduction?8

Whether the home office is the taxpayer’s principal place of business is determined by a test laid out in the 1993 Supreme Court case Commissioner v. Soliman.9 The determination turns “upon the particular facts of each case,” taking into account “two primary considerations,” which are “[1] the relative importance of the activities performed at each business location and [2] the time spent at each place.”10 COVID-19 will be prevalent in the “particular facts” of every case regarding this deduction in 2020. For employees working from home due to COVID-19, the Soliman test would likely lead to the conclusion that whatever part of the taxpayer’s home they use as a work office would be considered their principal place of business. This is because such a taxpayer would have performed all, or the vast majority, of their important business activities at home because they simply have not been working from their normal work office, and therefore have spent no time there. COVID-19 therefore influences the test in favor of a taxpayer claiming that their home office is their principal place of business.

For the second question, courts vary on how stringently they review the exclusivity requirement. On one hand, when the taxpayer cannot provide evidence that proves they use the space exclusively as a home office, courts tend to deny the deduction.11 But there are other cases where the court permits the deduction seemingly based on the taxpayer’s word that they use the home office exclusively as such.12 If there is leniency to be found in this requirement, as there seems to be since it is judged on a case-by-case basis, COVID-19 forcing an employee to work from home could work in a taxpayer’s favor. However, the opposite may be true as well. If courts fear a flood of home office deductions being claimed that normally would not satisfy the exclusivity requirement simply because taxpayers find themselves working from home, they may scrutinize exclusivity more stringently than before.

Regardless of how COVID-19 may affect the exclusivity review, taxpayers can do certain things to help them convince courts that their home offices were used exclusively for that purpose. For instance, a taxpayer can set up a partition dividing a room if the office is not already its own separate room.13 A taxpayer can also remove other items in a room that are for the personal use of other family members and testify that no other family members used the home office or the rest of the room.14 And, if there is special equipment relating to the taxpayer’s trade or business, including that in the home office can help a taxpayer prove exclusivity.15

For the third question, if a taxpayer is employed, they are considered to be in the trade or business of being an employee.16So, as long as they are doing their job as an employee in their home office, the third eligibility requirement for the home office deduction will be fulfilled. COVID-19 doesn’t have much bearing on this third prong, as an employee would be considered to be in the trade or business of being an employee, pandemic or not.

In summary, employees working from home due to COVID-19 will very likely have their home office qualify as their principal place of business. And, as employees are considered to be in the trade or business of being an employee, their time spent in the home office will satisfy the requirement that they use that space for their trade or business.17 Therefore, whether they get the deduction will likely turn on whether their home office was used exclusively and regularly as their principal place of business. There are arguments that can be made either way as to whether COVID-19 should and might affect this exclusivity requirement. In general, however, the more a taxpayer can make their home office look separate from the rest of their dwelling unit, remove all objects that could be considered to be used for personal, non-business reasons, and ensure that no one else uses the space, the more likely they are to be able to prove they used their home office exclusively as such.

The second main category of deductions relevant to an employee working from home contains all other “ordinary and necessary” trade or business expenses.18 These expenses will be things like buying computer paper or some pens.19 For income tax purposes in 2020, whether an employer has reimbursed these expenses is important to know. If the employer reimburses the employee for these expenses, then the expenses are deducted “above-the-line” and factor in to calculating the taxpayer’s adjusted gross income.20 An “above-the-line” deduction means that a taxpayer subtracts that deduction from their gross income before taking any other deductions. These “above-the-line” deductions are therefore advantageous because they can be taken in addition to the standard deduction. Any of these expenses that are unreimbursed, however, will be considered miscellaneous itemized deductions.21 This distinction is particularly important in 2020 because the 2017 Tax Cuts and Jobs Act (“TCJA”) expressly disallows taxpayers from taking any miscellaneous itemized deductions between 2018 and 2025.22 That means that if an expense is unreimbursed, a taxpayer cannot claim a deduction for it in 2020.23

To understand how this framework would affect the 2020 tax return of an employee working from home due to COVID-19, let’s look at a hypothetical situation. Let’s say our taxpayer is an employee who has been working from home since April 1st, 2020. Our taxpayer lives in a 1,000 square-foot apartment and has erected a partition to section off a 300 square-foot corner of their living room to use as their home office. They live alone, recently bought some computer paper which their employer reimbursed, and also bought a large whiteboard to hang on the wall, which their employer did not reimburse.

The first thing we’ll analyze is whether they would qualify for the home office deduction. As they have only worked from that corner of their living room since April 1st, that will likely qualify as their principal place of business under the Soliman test.24 They would also satisfy the requirement that the space be used for their trade or business as long as they have used it to do their job as an employee. Then, as long as they have not used the office for anything else, they will be considered to have regularly used that space exclusively as their principal place of business. This taxpayer theoretically should qualify for the home office deduction. As their home office occupies 30% of the square footage of their apartment, they could use the home office deduction to deduct 30% of costs from April 1st onward attributed to their entire apartment—including, but not limited to, rent, heat, utilities, etc.

The computer paper, which was reimbursed by their employer, would be deductible from their gross income as they calculate their adjusted gross income. But the whiteboard, for which the employee was not reimbursed, would not be eligible as a deduction in 2020 since it would need to be deducted as a miscellaneous itemized deduction.

While the TCJA eliminated deductions for unreimbursed trade or business expenses, it also significantly increased the standard deduction.25 With that increase (up to $12,000 for single filers and $24,000 for married taxpayers filing jointly), and other home office purchases likely being equipment (like a printer)—which are capital expenses rather than “ordinary and necessary” business expenses—the chance that unreimbursed expenses for a home office would augment other itemized deductions sufficiently to exceed the standard deduction seems unlikely for most taxpayers. Therefore, disallowing deductions for these unreimbursed “ordinary and necessary” expenses does not seem likely to have a significant impact for the tax treatment of an employee’s home office. The Senate has introduced a bill that would once again allow deductions for these unreimbursed expenses,26, but as this paragraph has posited, reinstating those deductions probably would not have too much of an effect given the increase in the standard deduction.

There are things an employer can do to help their employees as they outfit their home offices while also helping themselves taxwise. For instance, employers could simply have a reimbursement arrangement for the home office expenses of their employees. Having those expenses reimbursed would allow employees to take a deduction while calculating their adjusted gross income.27 Doing so would help employers as well, as they are similarly allowed deductions for the amount they reimburse their employees for those expenses.28

In 2020, and given COVID-19, employers may have yet another significant way to help their employees while also helping themselves. Currently, any capital expense (which includes, but is not limited to, equipment, like a computer monitor) is immediately deductible in full.29 Normally, employers would be forced to capitalize the cost of new equipment and to take depreciation deductions over a certain number of years.30 Instead, by offering this “bonus depreciation” that allows immediate expensing of the cost of equipment, the TCJA currently incentivizes employers to buy new equipment. And, to help employees who are used to having certain equipment in their normal work office that they don’t have at home, employers have two ways they could get office equipment to their employees, each with different tax consequences. First, they could allow their employees to come take the old equipment from the work office back to their home offices and then the employers could outfit the work office with all-new equipment. Or, they could purchase all-new equipment and give that to their employees to use in their home offices while requiring that the employees bring it to the normal work office whenever the employer opens that space back up.

The tax treatment for these two ways to get employees office equipment is different because of (1) COVID-19 forcing employees to work from home, and (2) the specific language of section 168(k), which imposes a requirement that the equipment be “placed in service” at the employer’s place of business.31 Whether employers may “place in service” new equipment by giving it to their employees for use in their home offices appears to be a novel question. For the purposes of this deduction, COVID-19 might change the employer’s place of business from its normal space, like an office building, to a network of various home offices. If that’s the case, the employee would receive the benefit of using the all-new equipment without having to include its value as income, while the employers would be able to take a full, immediate deduction for the cost of the equipment the year they put it into service.32 If, however, buying all-new equipment and allowing employees to use that in their homes does not count as “plac[ing] [the equipment] in service,” then the employers would not be allowed to immediately deduct the cost of equipment. As the traditional place of business for employers has typically been a space like an office building, the safest bet to ensure deductibility of newly purchased equipment would be to outfit that space using the new equipment after employees have taken the old equipment away to use in their individual home offices.

Overall, COVID-19 will likely help taxpayers claim deductions related to working from home. COVID-19 essentially turns the home office deduction test into a question of whether the space was used exclusively and regularly for that purpose. If a taxpayer can prove it was, then they likely will get the deduction. Even if they can’t, there may be some leniency in how stringently courts scrutinize the exclusivity requirement. Whether COVID-19 would affect that standard of review favorably for the taxpayer or not, however, remains an open question. Another open question is the tax treatment of employers purchasing all-new equipment for their employees to use in their individual home offices. The treatment will likely turn on whether the employer will be considered to have “placed [the equipment] in service” in their employees’ home offices. Given how employers allowed employees to take computer monitors and other equipment from their normal work office home at the start of the pandemic, there is, at least, an equitable argument for deductions for employers who buy new equipment now for their employees’ home offices because of COVID-19. And, employers can already help their employees by reimbursing ordinary and necessary business expenses related to working from home.

COVID-19 has radically altered the way in which we all work. Perhaps it can also alter the traditional treatment of certain tax deductions in ways that benefit employees working from home due to the pandemic.

  1. I.R.C. § 280A(c)(1)(A). 

  2. I.R.C. § 162(a). 

  3. I.R.C. § 280A(c)(1)(A). 

  4. I.R.C. § 162(a). 

  5. Popov v. Comm’r, 246 F.3d 1190, 1192 (9th Cir. 2001) (quoting I.R.C. § 280A(c)(1)(A 

  6. I.R.C. § 280A(c)(1)(A). 

  7. Id. 

  8. Id. 

  9. 506 U.S. 168. 

  10. Id. at 175. 

  11. See, e.g., Kurzet v. Comm’r, 222 F.3d 830, 839 (10th Cir. 2000) (denying the home office deduction because of the taxpayer’s “failure to direct th[e] court’s attention to portions of the record which clearly establish that their use of these rooms was ‘exclusive’”). 

  12. See, e.g., Popov, 241 F.3d at 1194 (holding that the living room in a one-bedroom apartment for a violinist who lived with her spouse and four-year-old daughter was used exclusively as the violinist’s home office). 

  13. See Weightman v. Comm’r, 42 T.C.M. (CCH) 104 (1981) (“The presence or absence of a wall, partition, curtain, or some other physical barrier separating the two areas is a factor for the Court to weigh. Absent a wall, partition, curtain, or other physical demarcation of the business area, the Court as the trier of fact may well view with a somewhat more critical eye the evidence adduced by the taxpayer to establish that there was in fact some separate, though unmarked, area that he used exclusively and on a regular basis as his home office.”). 

  14. See Pearson v. Comm’r, 43 T.C.M. (CCH) 1508 (1982) (holding that the taxpayer had not proven exclusivity after finding that “[t]he area used as a home office . . . was only part of a room, and the balance of the room contained Mrs. Pearson’s sewing machine and was used by other members of the family. The family also used the telephone.”). 

  15. See Thalacker v. Comm’r, 48 T.C.M. (CCH) 1104 (1984) (granting the home office deduction for rooms in which the taxpayer, who was in the photography business, set up laboratories to develop and print film). 

  16. Primuth v. Comm’r, 54 T.C. 374, 377 (1970). 

  17. I.R.C. § 280A(c)(1)(A). 

  18. I.R.C. § 162(a). 

  19. See Treas. Reg. § 1.162-1 (as amended in 1993). 

  20. I.R.C. § 62(a)(2)(A). 

  21. I.R.C. § 67(b). 

  22. I.R.C. § 67(g). 

  23. Id. 

  24. Soliman, 506 U.S. at 175. 

  25. I.R.C. § 63(c)(7)(A). 

  26. Tax Fairness for Workers Act, S. 1026, 116th Cong. (2019). 

  27. I.R.C. § 62(a)(2)(A). 

  28. I.R.C. § 162(a). 

  29. I.R.C. § 168(k)(6)(A)(i). 

  30. I.R.C. § 167(a). 

  31. See I.R.C. § 168(k)(1). 

  32. I.R.C. § 168(k)(6)(A)(i). 

The following two tabs change content below.

Robby Eisentrout

Latest posts by Robby Eisentrout (see all)