Matt Alexander couldn’t believe what his accountant was telling him. As a telecommuter for a Southern California real estate investment company, Alexander works from a home office. His accountant recently broke the bad news that the tax overhaul passed in late 2017 took away remote employees’ right to deduct their home office from their taxes. That means Alexander lost a tax break worth $10,000 a year. He was so upset that he wanted other telecommuters to know, and contacted me.
“The fact that I was hired as a remote employee . . . was conditioned on the fact that my company was not having to establish another satellite office with that overhead expense,” Alexander said. Yet going forward, “I was personally carrying this cost for the company.”
The change applies to employees who work remotely and use a portion of their home exclusively and regularly for business. It does not apply to self-employed people or business owners with home offices. It’s part of a larger transformation in the tax code that removes employees’ ability to deduct business expenses that their employers do not cover. Employees formerly were able to deduct unreimbursed business expenses if they itemized them, and if those expenses added up to more than 2 percent of their adjusted gross income.
“When remote workers are expending funds for their work, the reality is that they are taking a pay cut,” said E. Martin Davidoff, a certified public accountant and tax attorney based in Dayton, New Jersey. “Yet, they are no longer getting a tax cut.”
Until this change in the tax code, eligible unreimbursed expenses included items such as tools, computers, uniforms, mileage, industry conferences, professional memberships, continuing education – and the cost of maintaining a home office. The home office tax break was significant because it applied to more than rent or mortgage. If an office made up, say, 10 percent of a home’s total area, workers were allowed to deduct 10 percent of their property taxes, utilities, insurance, security, maintenance, repairs and so on. Not anymore.
The change goes into effect for telecommuters’ 2018 taxes. The 2017 taxes filed in April were still eligible for the home office tax deduction. Unsure if you have benefited from this deduction in the past? Did you or your tax preparer complete a Schedule A form? Unreimbursed employee expenses are listed on line 21. If you see unreimbursed expenses there, scan down to line 27 to find out if they resulted in a deduction. People subject to the alternative minimum tax (AMT) are not able to deduct such expenses.
“Seeking out professional tax advice would be smart, as such a professional can customize possible solutions to the worker’s situation,” Davidoff said.
If this tax change affects you, here are some possible workarounds:
Ask for a raise: Matt Alexander tried this. The same tax bill that took away the home office tax deduction for telecommuters gave companies a 40 percent lower corporate tax rate, so he figured his company could afford it. “The corporate tax cut . . . is a huge windfall to companies,” Alexander said. “It might be worthy of companies to reconsider what they do to compensate remote employees.” His boss turned him down.
Ask for a pay cut: Yes, sounds crazy, but you could ask for a pay cut in exchange for your company covering the out-of-pocket expenses it currently does not. You will come out ahead, because income is taxable but expenses are not, as long as they are structured correctly. (More below.) “There is little downside for employers to do so,” Davidoff said. “They also get the benefit of lower payroll taxes.”
Rent out your home office: Ask your employer to pay you rent for the use of your home office. Davidoff says this is legitimate as long as your employer is not related to you.
Ask for a one-time bonus: If your company says no to a raise or paying rent, you could ask for a one-time bonus. That will give you time to adjust to the loss of the home office tax break. The downside is you will have to pay income tax on the bonus.
Set up an accountable plan: Rather than a taxable bonus, you could ask your employer to create an “accountable plan” that reimburses you for business expenses. The Internal Revenue Service spells out the rules for accountable plans on its website. You do not have to pay income tax on “accountable plan” money as long as your expenses are for legitimate business activities and you submit receipts that prove it.
Change your status: If you work in a field where you accrue high-dollar unreimbursed expenses, then it may be worth it for you to change your employment status from employee to contractor. Just be sure to carefully weigh lost employee benefits, such as health insurance and 401(k) matches, against the tax deductions you would gain as a contractor.
There’s one final move you can make: to a new job. That’s what Alexander did when his firm wouldn’t help him bridge the gap caused by the lost tax deduction. “Luckily, I have been successful in getting a better offer to join another company,” he said. “And I will still be able to work remotely from my home.”