Q: Given the loosening of eligibility rules, should remote workers claim a home-office deduction this year?
Kelly Phillips
A: It would be nice to be able to claim a home-office deduction this year; unfortunately, as part of the changes brought about by Tax Cuts and Jobs Act of 2017, miscellaneous itemized deductions were axed. So, there’s no place to claim a home office deduction for a W-2 employee. (It wasn’t that easy to do in the first place; you had to get over 2 percent of your AGI in expenses before you could deduct the first dollar.) If someone is self-employed or is a partner in a partnership and can take unreimbursed partnership expenses against their partnership income, they may be able to take a home-office deduction if they meet the stringent rules for doing so. The rules state that the area in the home must be used regularly, exclusively, and for the convenience of the employer as: the principal place of business; as a place to meet with clients in the normal course of business; or in connection with the business if it is a separate structure not attached to the taxpayer’s personal residence. Occasional or incidental business use doesn’t meet the test. In evaluating the deduction with clients, the hardest part is that it must be used exclusively for business. Any personal use of the space, no matter how miniscule, means the exclusive-use test has not been met, and no deduction is available. A schedule C worker may not use the home-office deduction to create a loss. There are some different considerations if the taxpayer is a day care owner, but by and large, the home-office deduction is no longer an option for most taxpayers. The state of Arkansas does still allow miscellaneous itemized deductions, and it has followed the federal regulations with regard to home-office deductibility.
Q: What other tax rules have been tweaked as a result of the pandemic?
A: One of the larger questions arising out of working remotely is that of state taxation. If you lived and worked in California before the crisis, but once you were sent home to work remotely you returned to your family’s home in Arkansas, where should you have withholding remitted for purposes of state income tax? California? Arkansas? Should you file a tax return in Arkansas? These are uncharted waters, and I think states will start challenging taxpayers to prove that they shouldn’t be taxed in the state where they worked remotely. In an Arkansas Revenue Legal Counsel Opinion in early 2020 (No. 20190514, Feb. 3), a remote worker was determined to have an Arkansas income-tax filing obligation even though the worker was providing services for a company that had no other ties to the state and for all other years would not have been required to file an Arkansas income-tax return. The ruling stated that it didn’t really matter that the employer didn’t have a corporate-filing requirement and that the employee working in Arkansas did not create a corporate-filing requirement, but the employee would have an Arkansas income tax obligation, whether the company withheld Arkansas income tax from the employee’s wages or not.
New York, in particular, has tried to address the remote working arrangement and asserted that work performed in another state by remote workers should be considered work performed in New York unless the work was performed outside the state for the necessity of the employer and not because it was more convenient for the employee to work in another taxing jurisdiction. Some states have a number-of-days threshold to determine if an employee should be filing an income tax return. There will be lots of states examining their rules closely to try and keep tax dollars from slipping across the borders. They will also be looking to tag workers who relocated either temporarily or permanently into their taxing jurisdictions, creating a new tax liability for themselves by working from home. If you find yourself in this situation and filing two (or more!) state tax returns, there is probably some relief for you in your resident state. You can usually take a tax credit against your resident-state tax liability for taxes paid to other states. Don’t assume that your tax situation has remained the same if you have changed where and how you work.
Q: Will a change in leadership in Washington impact my taxes this year?
A: We don’t think that there will be any large-scale changes to the tax code this year, even with a change in the White House. The primary concern is to make sure the bill passes and is signed that allows small businesses to deduct expenses they used Payroll Protection Plan money on and had forgiven. As it stands now, if a company got PPP money, and either has already received forgiveness of the loan or reasonably expects to receive forgiveness in 2021, they are not allowed to deduct the expenses that make up the amount being forgiven. Congress has repeatedly said this was never the intent of the plan, but as Congress did not specifically address it in the original law, the IRS interpreted and ruled on how taxpayers should treat the loans and the expenses for tax purposes. The fix to allow those expenses to be deducted is part of the bill that was still unsigned the final week of December. Hopefully, it will not get lost in the shuffle of back and forth and put all of PPP recipients in a bind, tax-wise.
READ MORE: The Taxman Cometh: Experts Weigh in on the Dynamics of Tax Policy in 2021
