As the work-from-home movement shifts from stopgap measure to everyday reality, there are all kinds of financial questions to consider on both the employee and employer side. Brian Baker, a certified public accountant and partner with HHM CPAs, has some answers.
Q: One question I hear a lot is about the deduction of office expenses for people who are now working from home. Can I write off my fancy new office chair or my jumbo pack of multi-colored sticky notes?
A: Unfortunately, if you're an employee, the 2017 tax reform suspended the deduction for unreimbursed employee business expenses for years 2018 through 2025. If Congress does not pass any additional law and this runs its course, then beginning in 2026, that deduction will automatically come back. But who knows what will happen between now and then? For the moment, this means no deduction for the home office including furniture, equipment and supplies. However, the deduction for self-employed individuals is not impacted, so sole proprietors and other self-employed folks can still claim their business expenses as they have in the past.
Q: What if I'm an employer and I buy supplies or equipment for my employee who is working from home?
A: If an employer buys supplies for employees working at home, those expenses should be deductible by the employer. Employers can also reimburse employees for supplies bought by the employee. For example, if an employee has an expense related to their work as an employee — say they buy paper for business use — the employer reimburses them for the cost of the paper. As long as its done through an accountable plan, the employer can deduct that expense and the employee does not have to claim it as income. The employee does have to show the business connection to the expense, provide a receipt. Another situation may be that the employer pays the employee $100 a month to cover expenses. If there's no requirement that the employee pay back any excess amount after expenses, the full $100 is treated as wages.
Q: In a community that sits at the border of several states, some of us work in one state and live in another. Or we did before the coronavirus crisis sent so many of us home to work. What happens if I live in Tennessee, where there's no income tax, but I work in Georgia, where there is? If I'm now living and working from my home in Tennessee, do I still owe Georgia taxes? Any other state issues that might get tricky?
A: If you are an employee living in Tennessee and working in Georgia, your employer normally should be withholding Georgia income taxes from your wages and you will file a Georgia nonresident income tax return. Now that you are working at home in Tennessee, you may be still be treated as working in Georgia under guidance provided by the Georgia Department of Revenue. The Georgia Department of Revenue website includes a FAQ on this topic.
Q: What if I'm an employer in one state who now has employees working from home in another? Does that change things for me in terms of taxes?
A: This is an area that will probably impact many businesses. Many states require businesses to file income tax returns and withhold income tax from employees' wages if the business has a sufficient connection with the state. Such a connection might be established if employees are working in the state.
For example, a business might have an office in downtown Chattanooga and all employees have historically worked from this office. Well, what happens if some of the employees live in Georgia and are now forced to work from home? All of a sudden, the business could be subject to taxation in Georgia and could be required to withhold Georgia income tax for the employees working in Georgia.
Locally, both Georgia and Alabama have come out with guidance providing some relief in this situation on Department of Revenue websites for these states. If the requirements are met, the state will not subject the business to income tax or withholding due to employees temporarily working in the state. Tennessee has not provided any guidance on this topic at this point, so businesses and employees should assume that the general rules will apply.
Q: Are there any other financial implications of working from home or having a home-based workforce that are important to explore?
A: There are many other non-tax implications that businesses should consider when contemplating whether to allow employees to continue working remotely. Some of these benefit the business and some benefit the employee. Businesses may save on the cost of rent or building ownership if less space is being used. Employees will benefit from less time and expense for commuting and will likely have a better work-life balance as a result.
Q: Are there implications of the temporary work-from-home situation becoming permanent? What's the threshold for declaring that the temporary measure is no longer temporary?
A: For purposes of the guidance, I don't think there is any bright line — I think it's a matter of what your intent is. If you reach the point where you've decided, OK, we're going to do this arrangement indefinitely, at that point you need to be aware that decision will lead to tax implications. There is a discussion in the Georgia FAQ that is more detailed on what time period they consider to be temporary. If you continue to work from home, that could trigger taxes. Once the employee and employer make that decision that this will be more than temporary will be the point where you have to reconsider the tax consequences.
In any case, this is an evolving situation — we can get new guidance or changed guidance at any time. This has been changing so drastically over the last couple months, things could change tomorrow.