The provisions and implications of the Tax Cuts and Jobs Act that was passed into law last December have been covered extensively, including articles we wrote soon after the law went into effect.
However, there’s one provision that hasn’t received a lot of attention that you should probably know about. The legislation eliminated the unreimbursed business expenses and home office tax deductions for employees who work remotely from their home. The change is effective this year, which means 2017 was the last year you could take advantage of the deduction if you qualified for it.
Before the Legislation
Before the tax reform act, remote employees who used a portion of their home exclusively and regularly for business could (under certain conditions) deduct business expenses they incurred that were unreimbursed by their employer. The deduction applied if the employee itemized deductions on his or her tax return and if the business expenses added up to more than two percent of the employee’s adjusted gross income (AGI).
Among the unreimbursed business expenses many remote employees deducted were things like computers, tools, uniforms, professional memberships, continuing education courses and miles driven for business purposes. Perhaps the biggest deductible expense, though, was the costs associated by employees with maintaining their home office.
Deductible home office expenses went beyond just rent or mortgage payments. They also included property taxes, home insurance, utilities, repairs and maintenance, and similar expenses involved in owning a home. So if the dedicated home office constituted 10 percent of a home’s total square footage, the telecommuting employee could deduct 10 percent of these costs on his or her federal tax return.
Important note: The tax reform act did not eliminate the home office deduction for self-employed individuals and those who operate a business from home. So if you are self-employed or run your own business and have qualified for the home office deduction in the past, nothing in the tax law will change this.
Ways to Cushion the Blow
If you are a telecommuting employee and were eligible for this tax break in the past, losing the deductions could have a significant impact on your net income. Here are 5 strategies that can help cushion the blow:
- Seek a raise from your employer. While taking away this tax break from telecommuters, tax reform reduced the corporate tax rate by 40 percent. With some of this tax savings, your employer might be willing to raise your salary in an amount equal to your lost net income.
- Request a bonus from your employer. Your company might be more willing to give you a one-time bonus to help ease the financial impact rather than give you a raise. Keep in mind that the bonus and additional salary will be taxable so factor this into your calculations.
- Ask your employer to reimburse business expenses you incur. In return, your employer could reduce your salary by a proportional amount so it nets out the same. You could actually come out ahead since income is taxable but expenses aren’t; however, this could be offset by the loss of the home office deduction.
- Look into creating an accountable plan. These are special accounts set up by employers to reimburse business expenses paid by employees. Income taxes are not assessed on money placed in an accountable plan if the expenses are for legitimate business activities and receipts are submitted to substantiate them.
- Change your employment status. This idea is a little more radical but it might make sense if you have a large amount of unreimbursed business expenses and none of the strategies above are viable. You would ask your employer to change your status from an employee to an independent contractor. The potential downside of this strategy is the loss of fringe benefits like health insurance and a 401(k) so be sure to factor this into the equation.
Seek Professional Advice
The details and nuances of this provision of tax reform can get complex. Therefore, you should speak with a tax advisor before implementing these or any other similar strategies.