If you worked from home during 2020, you may be wondering if you can deduct any expenses related to setting up your home office. The answer depends on whether you were an employee or an independent contractor. But home office expenses aren’t the only tax issue to consider when working from home in 2020. Working remotely for half a year or more from a different state than your permanent residence could lead to owing state income tax in that state as well.
Tax Questions When Working Remotely
During the COVID-19 pandemic, your work life and location may have changed more than once throughout the year. Each situation is different, whether you remained employed, changed employers, or were self-employed during 2020. Here is some general information on tax matters related to working from home. Contact your CPA for answers to specific questions.
- Working from home as an employee. Basically, if you were an employee working from home in 2020, you are not eligible to deduct any home office expenses that you personally incurred. You can be thankful you saved on gas, parking, dry cleaning, and other commuter expenses, but that’s about it. The ability to deduct home office expenses disappeared with the passage of the Tax Cuts and Jobs Act of 2017. Prior to that, home office expenses were considered unreimbursed business-related expenses and fell into the miscellaneous itemized deductions category. The total amount of miscellaneous itemized deductions over 2% of adjusted gross income could then be deducted. This deduction has been suspended through 2025.
If you spent money to set up your home office and your employer reimbursed you, then the expenses are most likely not taxable, provided they are ordinary and necessary or considered commonly accepted in your industry. If your employer spent its own funds and provided equipment or supplies for you to work from home, those expenses are most likely deductible by your employer and have no tax consequence for you.
However, if your employer gave you a stipend to set up your home office, that money could be considered taxable income. If your employer has a policy that requires you to submit an expense report substantiating the use of the stipend on office equipment, the stipend is more likely to be treated as a reimbursement.
- Independent contractors working from home. If you are self-employed, some expenses related to a home office may be deductible. Independent contractors who work from home can deduct portions of their mortgage interest (not payments), rent, and other housing expenses that relate to an area, such as a spare bedroom, that is used exclusively for business purposes. The rules are complicated and can be found detailed in IRS publication 587. Note, for years home office deductions have been a red-flag for an IRS audit. Consult your tax advisor for guidance in this area.
Supplies, mailing costs, subscriptions, Google ads and other smaller business expenses that are generally not reimbursed by a client are usually deductible for an independent contractor. Larger items, like office furniture, computers, and printers, might be deductible in the year purchased or you can choose to recognize them as assets and depreciate over their useful life. Again, the rules are complex and can be found in IRS publication 587. Contact your accountant for specific advice.
- State income taxes. These might seem straightforward. If you live and work in one state, you pay taxes there. But what if during COVID-19, you left your permanent residence, rented a house and worked remotely for six or more months in a different state? If you are a Georgia resident who escaped to Hilton Head in South Carolina or a Florida resident who spent more than half the year on Lake Lanier and worked while there, you might owe state taxes in that non-resident state. States with income tax usually have a resident and non-resident income tax. It’s best to keep records of the number of days you lived and worked in each location and consult your tax professional regarding state income taxes.
If you have questions about home office expenses, reimbursed office expenses, or state income taxes, we can help. Call us today!