TAX RULES AFFECTING TELECOMMUTING
Increasingly, businesses across the country Regular and Exclusive Use. Various tests
are finding that allowing employees to must be satisfied in order for an employee to
telecommute can be a win-win situation. be able to deduct the direct expenses and the
Employees can gain more flexibility in their business portion of indirect expenses
work life. Employers can reduce overhead relating to a home office. The tax law
expenses, secure talent beyond the business’ requires that the home office be used
immediate geographic vicinity, and even regularly and exclusively as a principal
accomplish contingency planning objectives. place of business or as a place to meet or
deal with customers or clients in the
The value of these cost-saving measures and ordinary course of business.
business enhancements are amplified during
trying economic times. An overview of the As a practical matter, employees don’t
federal tax rules applicable to telecommuters commonly use a home office to meet with
and those who employ them can help clients. Accordingly, deductions may be
identify possible opportunities available limited to situations where the home office
when certain employees work off site. is used regularly and exclusively as the
employee’s principal place of business.
Deducting Home Office Expenses
Types of Expenses. Federal income-tax rules In situations where an employee works from
generally categorize telecommuting home full-time, the principal-place-of-
expenses as either direct or indirect in business test is usually easily met. However,
nature. if one’s time is split between the home and
an outside office, federal tax rules generally
Direct expenses are those that relate only to state that the test is also satisfied if
the portion of the telecommuter’s home that administrative or management activities are
is actually used as a home office. Such performed at the home office to the
expenses may include improving or exclusion of other fixed locations.
repairing the actual work space.
For the Convenience of the Employer. An
Indirect expenses may relate to both the employee must also be able to show that the
personal portion of the home as well as the use of a home office is for the convenience
home office. Common examples of indirect of the employer. This test is generally
expenses include real estate taxes, considered to have been met if the employer
homeowner insurance premiums, and repairs requests that the employee work from home.
benefiting the entire home. Alternatively, this test is also considered
satisfied if the employee is not in the office utilities and maintenance expenses allocable
on a regular basis due to the nature of his or to the home office (with the employer
her work. potentially claiming a deduction for the
reimbursements). Or the employer may
Ultimately, the “convenience” test is provide the telecommuting employee with
determined by the facts and circumstances necessary supplies and equipment and,
of the employment arrangement. In general, accordingly, claim an ordinary business
if the employee requests to telecommute, it expense deduction.
commonly results in not having satisfied the
test. However, the particular circumstances As a general rule, it is advantageous for an
may show that the arrangement was expense or reimbursement arrangement to
established for the benefit of the employer, qualify as an “accountable plan.” Otherwise,
despite the fact that the employee chose to adverse income-tax consequences may flow
telecommute. For example, if the employer to both your business and the employee.
looks for volunteers to telecommute for
legitimate business purposes and the Computers and Other Equipment
employee volunteers, that arrangement If a telecommuting employee purchases a
could qualify as being for the employer’s computer or other equipment and uses it
convenience. exclusively for business-related purposes, he
or she may depreciate or expense the item,
How Tax Benefits Are Claimed subject to a 2%-of-AGI limitation. If, on the
If an employee qualifies to claim various other hand, the employer provides such
deductions relating to the business use of a equipment, the employer may claim
home office, he or she would do so on appropriate deductions as if the item were
Schedule A, Form 1040, as a miscellaneous located in the employer’s regular offices.
itemized deduction subject to a 2%-of-
adjusted-gross-income (AGI) floor. Tax Wholly unrelated expenditures, such as
rules limit the ability of a taxpayer- those relating to general landscaping or
employee to claim telecommuting expenses improving a room that is not used
to the extent the business deductions exceed exclusively for home office purposes, are
his or her gross income for the tax year. not deductible under the federal tax rules.
An employer may choose to reimburse an If we can be of assistance to you in
employee for expenses incurred relating to understanding the tax issues surrounding
office supplies and equipment, as well as for telecommuting, give us a call.