“Tax Equity Requires Reinstating the Home Office Deduction” – Law360

“Tax Equity Requires Reinstating the Home Office Deduction” – Law360

Over the past two and a half years, the job market has changed tremendously due to the COVID-19 pandemic. During this unprecedented time, employees have experienced a new normal that included working from home, eliminating both the time and cost of commuting to the office.

Unable to go to the office, employees were forced to set up workspaces and dedicate a portion of their homes to their employers. Technology that allows remote work, in this case, requires tax equity. Employees should thus be given a tax deduction on the portion of their abode that is dedicated to their work.

On this score, the home office deduction, which was eliminated as part of the Tax Cuts and Jobs Act in 2017, should be reinstated as an above-the-line deduction, like commuter expenses and unreimbursed health care costs.

Overall, the TCJA significantly reduced corporate tax rates and flattened the income brackets relating to individual taxpayers. The legislation also either eliminated or greatly reduced the number of miscellaneous deductions once relied upon by the taxpayer to reduce the amount of tax owed by these individuals.

Among the deductions on the legislative chopping block was the expanded home office deduction for W-2 employees, previously outlined in Section 280A of the Internal Revenue Code. The home office deduction has been eliminated until 2025, but should be reinstated before then.

In the past, the home office deduction underwent several metamorphoses. For many years, the deduction reflected U.S. Tax Court decisions recognizing the validity of these expenses when taken by individual taxpayers and small businesses.

However, in 1993, the U.S. Supreme Court severely limited this deduction in Commissioner v. Soliman, imposing an onerous two-part test consisting of (1) the relative importance test; and (2) the time test. The application of these two tests made it virtually impossible for most individuals and small businesses to claim and take advantage of the deduction on their tax returns.[1]

In 1997, Congress passed, and former President Bill Clinton signed, the Taxpayer Relief Act. This legislation effectively overruled the Soliman decision by enacting IRC Section 280A. [2] Section 280A made the home office deduction a flexible tool, not only reflecting that many employees worked from home, but also that they operated small businesses out of their homes.

For example, an individual W-2 taxpayer who used a part of their home exclusively and regularly for administrative or management activities was eligible to take the deduction. The home office deduction was also available to individuals and small businesses where an exclusive portion of the home was used to meet customers or clients. In sum, the deduction was available to W-2 employees, as well as independent contractors, freelancers and small business owners.

The TCJA eliminated the home-office deduction for W-2 employees. The then well-intentioned legislation could not have foreseen the catastrophic events that began in early2020. In March 2020, offices and places of business throughout the U.S. were closed due to the coronavirus pandemic.

As the nation slowly reopened, many employees continued working either full time or part time from their homes. Technology caught up with necessity, and for many, remote work has become the rule rather than the exception.

Many employees prefer this new version of normal, as do many employers. After all, if employees are working from home, less office space is required and therefore, employers shift this burden onto their employees.

This makes the proposed reinstatement of the home office deduction for W-2 employees’ revenue neutral. Employees would be allowed to take a deduction for their workspace. Their employer, on the other hand, would not be required to rent as much commercial space, thereby reducing the employer’s deduction for the rent.

For many W-2 employees, working from home has become nonnegotiable, and they require a quiet and dedicated workspace. However, working from home is not without its challenges — at home, employees are met with a set of challenges separate from those they would be met with at the office, including switching hats from parent to employee.

The oft-repeated scenario of small children running around in the background of Zoom calls, beloved dogs and cats interrupting business meetings, and young couples working separate jobs in one room of a cramped apartment, is forcing employees to upgrade their housing to accommodate the ubiquitous reality of remote work in modern-day America.

We recognize that elections have consequences. The two political parties have different views of what should be taxed, and when and where these taxes should be imposed and collected. However, we respectfully submit that tax ideology must give way to certain equitable and fair resolutions of new burdens not envisioned in earlier times.

Simply put, prior to 2025 the Section 280A deduction should be reenacted so that the home office deduction is again available to W-2 employees as an above-the-line deduction. Just like elections, pandemics have consequences.

James J. Mahon is a shareholder and Samantha A. Lesser is an attorney at Becker &
Poliakoff PA.

The opinions expressed are those of the author(s) and do not necessarily reflect the views
of their employer, its clients, or Portfolio Media Inc., or any of its or their respective
affiliates. This article is for general information purposes and is not intended to be and
should not be taken as legal advice.

[1] Commissioner v. Soliman, 506 U.S. 168 (1993).

[2] See discussion in Flying Hawk v. CIR, T.C. Memo 2015-139.