Working from Home in the Era of COVID-19: Why American Workers May Need Federal Tax Reform Relating to Home Office Deductions

Today, nearly half of American workers are working from home full-time. As COVID-19 cases across the country and in Arizona specifically continue to rise, it is clear that working from home is the new normal. Teachers are lesson planning from their living rooms, therapists are Zooming with clients from their kitchens, news anchors are telecasting live from their dining rooms, and many other workers are working from their home offices. Whether you have always worked from home or have recently transitioned due to COVID-19 safety measures, you may be wondering whether you can claim a federal income tax deduction for the home office expenses you have incurred in the year 2020. Unfortunately, and perhaps surprisingly, the answer is likely no.

The 2017 Tax Cut and Jobs Act (TCJA)

"Home Office" by Jorge Quinteros is licensed under CC BY-NC-ND 2.0

The 2017 Tax Cuts and Jobs Act (TCJA) made a significant amount of changes to the tax code for the years 2018-2025. Among these changes was the elimination of miscellaneous itemized deductions, one of which was a deduction for home office expenses. Prior to the TCJA, taxpayers who elected to itemize and who were company employees could potentially deduct the percentage of their household expenses that were attributed to their use for work. These expenses are commonly referred to as unreimbursed employee business expenses—unreimbursed in the sense that employers typically do not pay for the expenses of employees incurred at a home office like they would for expenses incurred at a corporate office. After the TCJA and the elimination of miscellaneous itemized deductions, however, only taxpayers who elect to itemize and who are self-employed may potentially deduct home office expenses. These expenses are commonly classified as pure business expenses and remain deductible under Section 162 of the tax code.

The Home Office Deduction for Employees

Employees can no longer deduct home office expenses for federal income tax purposes. Several years ago, the IRS developed a series of criteria for determining the deductibility of home office expenses. Under Section 280A of the tax code, the home office space has to be exclusively used as either the taxpayer’s principal place of business or as a place of business where the taxpayer regularly meets with clients, patients, or customers. Additionally, the taxpayer’s use of the home office has to be for the convenience of their employer.

The “exclusivity” requirement expressed above is fairly straightforward in that it requires a taxpayer to demonstrate that their home office space is used only for work purposes throughout the year. Whether or not a taxpayer’s home office space is their principal place of business is a slightly harder inquiry. To qualify as their principal place of business, taxpayers must show that important income-earning activities are performed at the home office, and that a significant amount of time is spent at the home office when compared to the taxpayer’s work office (if one exists). Put more simply, to claim a federal income tax deduction for home office expenses, the home office cannot be a place where the taxpayer merely performs occasional work for their employer.

Although the TCJA eliminated this deduction for employees, arguably millions of Americans would qualify under this criterion for 2020. Employees have essentially picked up their work offices and brought them home. As many office spaces and company headquarters are closed, employees are using their homes as their principal place of business because they have nowhere else to work. Further, employees are meeting with clients, customers, patients, coworkers, etc., through telecommunication from their home offices. Employers are also significantly advantaged by separate home office spaces because they allow employees to focus better and work longer. Thus, the disallowance of the home office deduction may prove to be an unexpected yet significant financial burden for many American workers. 

The Home Office Deduction for Self-Employed Taxpayers

In contrast to employees, self-employed taxpayers can still deduct home office expenses for federal income tax purposes. Although they are also subject to the requirements laid out in Section 280A of the tax code, including the “exclusivity” and principal place of business requirements, the home office obviously does not have to be used for the convenience of an employer. If self-employed taxpayers meet the requirements of a home office deduction, they can fully deduct direct expenses subject to the business income limitation. Additionally, they can deduct indirect expenses such as property taxes, utilities, and rent by allocating a percentage of these expenses to the home office space and dividing by the square footage of the entire home.

The Need for COVID-19 Tax Relief and Reform

In 2017, Congress could not have foreseen that a global pandemic would send millions of American workers home in 2020. Regardless, our country is now faced with the beginning of a work-from-home era. As long as the threat of COVID-19 remains—and perhaps even beyond that—the support and consensus around working from home will only improve. While Congress has a lot of work to do in the coming months, perhaps tax reform for American workers relating to COVID-19 home office deductions should be near the forefront.

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By Sydney Finley.

J.D. Candidate, 2022

Sydney Finley is a second-year law student at the Sandra Day O’Connor College of Law and a staff writer for the Arizona State Law Journal. She was born and raised in north Phoenix and earned her bachelor’s degree from the Daniels College of Business at the University of Denver. In her free time, Sydney enjoys hiking, watching football, skiing, and spending time with family and friends.

The opinions expressed herein are those of the individual contributors to the ASLJ Blog and should not be construed as the opinions of the Arizona State Law Journal or the Sandra Day O’Connor College of Law at Arizona State University.