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The Design of a Home Office Deduction

Posted on Apr. 5, 2021
[Editor's Note:

This article originally appeared in the April 5, 2021, issue of Tax Notes Federal.

]
Margaret Ryznar
Margaret Ryznar

Margaret Ryznar is a professor of law at the Indiana University McKinney School of Law.

In this article, Ryznar reexamines the home office deduction in the context of the COVID-19 pandemic and argues that it is important for businesses and workers alike.

Copyright 2021 Margaret Ryznar.
All rights reserved.

People have already started to speculate about which pandemic changes may outlast the coronavirus threat, with possibilities ranging from online higher education to telehealth. Many suggest that telework, or work from home, will be one of them.1 This prompts a new look at an old deduction — the home office deduction.

Pre-1976, home office expenses were deductible as ordinary and necessary business expenses under section 162, and the deduction was broader than today. In Bodzin,2 for example, an IRS attorney worked from his home office in the evenings. He deducted $100 of his $2,100 rent as a business expense, which the Tax Court allowed because the home office was “appropriate and helpful” as well as ordinary and necessary.

Historically, this deduction received criticism on several fronts. It was seen as a tax break mostly for white-collar workers who could work from home. It was also seen as a slippery slope, as noted in the Bodzin dissent.

Perhaps for these reasons, Congress enacted section 280A in 1976 to replace the subjective “appropriate and helpful” standard. This code provision disallows deductions related to the use of a dwelling that also serves as a residence. Nonetheless, section 280A(c) restores those deductions to the extent that they are allocable to a portion of the dwelling used regularly and exclusively as the principal place of business for any business activity of the taxpayer. There has been significant litigation surrounding the meaning of principal place of business.3 However, a safe harbor provision in calculating the home office deduction based on the home office square footage helped simplify the deduction in 2013 for those wanting to forgo the actual-expense method.4

If the business activity is the performance of services as an employee, the deduction is allowed only if the business use of the home is for the convenience of the employer. The Tax Cuts and Jobs Act further minimized the home office deduction because it is a miscellaneous itemized deduction when it comes to employees; the TCJA temporarily suspended all employee deductions of home offices. As a result, the home office deduction is now mostly for people in business for themselves.

Yet there are numerous advantages to a home office deduction for employees, many of which result from the benefits of telework. The home office deduction is helpful enough to warrant expanding it, as the COVID-19 pandemic has shown.

Personal expenses are not normally deductible,5 but the tax law seeks to provide business incentives to strengthen the economy. This is particularly true in a weak economy, as seen in tax code provisions such as bonus depreciation.6 For these reasons, business activities receive tax incentives through, for example, the section 162 deduction, to protect jobs and labor, to expand the market, and to spur investment. Section 162 is a workhorse provision, providing the most deductions in the code.7

Although home offices have been traditionally viewed as helping employees, they now are understood to help businesses as well. The costs of living and working are relatively high in cities. Employers must pay high prices for leasing office space, and employees must buy within a commuting distance, often raising nearby home prices. Silicon Valley in California is a classic example of a location with elevated prices that has experienced an exodus of companies and employees during the pandemic.8 Telework allows companies and people to geographically spread out to avoid increasing prices in that way. Telework also allows the employer to recruit employees more widely because it isn’t bound by commuting limits. Productivity even increases, according to some studies of telework.9

Telework can help workplaces retain people who acquire temporary caregiving responsibilities. This addresses the current “sandwich generation,” which owes a responsibility to aging parents as well as young children. Women perform many of these caregiving duties, which carry high opportunity costs in terms of professional development. Yet women’s participation in the labor force is in line with public policy, expanding the economy. The value of paid labor is why the code draws the line between the deductibility of personal and business expenses, which is a quintessential distinction in the tax law.

Telework also reduces commute times, which have high costs. Commuting is a major, daily stressor for people, even causing some to prefer a salary decrease in exchange for working from home. Also, it is environmentally unfriendly to have mass commuters driving to and from work each day. Finally, strenuous or “super commutes” may affect the productivity of employees.10 Previous solutions to the commuting problem were extreme and expensive, such as digging tunnels for traffic, when it is far simpler to have more people stay home or rotate through the office.11 Although tax law doesn’t offer a deduction for commuting, according to Rev. Rul. 99-7, 1999-1 C.B. 361, tax law does exclude from an employee’s gross income some qualified transportation fringe benefits provided by an employer, such as transportation in a commuter highway vehicle, a transit pass, and qualified parking.

Telework helps people balance work and life, which increases work productivity. Many modern jobs have not been entirely kind to people. Americans are having trouble sleeping and with work-life balance.12 Compared with workers in other industrialized countries, Americans work longer hours and take fewer vacation days, with half not even taking their allotted vacation time. People are craving leisure time. When they do have leisure time, they spend it in front of the television or other screens. Civic engagement has decreased, and more people are “bowling alone,” without the benefit of social or other institutions.13

These arguments may have been less important when the technology could not support telework, but the pandemic has shown the modern possibilities of telework. The technology exists to facilitate work from home, and many of the benefits promised by technology are not fully materialized without telework.

A counterargument to telework has been that it may reduce the number of jobs over time, whether by supporting freelancing or facilitating the use of robots. However, past labor markets were all able to adjust to technological advances, such as incorporating smartphones and email into the workplace. Advancing technology has even brought benefits, including cheaper goods and improvements to how the world operated, such as electricity. Further, previous technological advances did not affect the number of jobs as much as their nature. Many jobs that exist today did not exist even a decade ago, and current jobs are often less dangerous and difficult than previous ones.

If working from home is accepted as desirable, it is better for businesses if their employees have a home office to work in rather than the kitchen or dining room table in the middle of a busy family home. In single-person households, a separation between work and personal time is also helpful for productivity, which is created by a home office in a spare bedroom, garage, or basement. For this reason, Google — like many other companies — gave its employees a financial stipend to improve their workspaces at home after the COVID-19 pandemic began.14 A home office deduction for employees serves as similar support to maximize business productivity because it requires an exclusive place for work in the home and supports purchases to facilitate it.

In sum, tax law at first glance seems to simply raise revenue to pay for public goods, but — perhaps as importantly — it is one of the most effective ways to encourage behavior. This is illustrated by a reintroduction and proper design of a home office deduction, which would lead to home offices for teleworkers, helping both employees and employers. Criticisms leveled at telework are eased by the fact that the home office deduction is merely a deduction, not a mandate — no one is being forced to work from home. Instead, the tax law is simply facilitating the benefits of telework for those who want to harness them.

FOOTNOTES

1 See, e.g., Andrew Anthony, “Another Day Not at the Office: Will Working From Home Be 2020’s Most Radical Change?The Guardian, Sept. 20, 2020.

2 Bodzin v. Commissioner, 60 T.C. 820 (1973).

3 See, e.g., Commissioner v. Soliman, 506 U.S. 168 (1993).

4 Rev. Proc. 2013-13, 2013-1 C.B. 478.

5 Section 262.

6 Section 168(k).

7 Adam Chodorow, “The Tax Consequences of Catalyzed Fans,” 6 Harv. J. Sports & Ent. L. 187, 195 (2015).

8 Eliot Brown and Aaron Tilley, “Covid-19 Pandemic Loosens Silicon Valley’s Tight Grip on Tech Industry,” The Wall Street Journal, Dec. 13, 2020.

9 Staff, “Covid-19 Has Forced a Radical Shift in Working Habits,” The Economist, Sept. 12, 2020.

10 Reggie Wade, “The Number of Americans Who ‘Super Commute’ Is on the Rise,” Yahoo Finance, Aug. 27, 2019.

11 The Boring Company, “Projects.”

12 See, e.g., Centers for Disease Control and Prevention, “1 in 3 Adults Don’t Get Enough Sleep” (Feb. 18, 2016); and Allison Pohle, “How to Improve Your Work-Life Balance,” The Wall Street Journal, Dec. 17, 2020 (“The Organization for Economic Cooperation and Development’s 2020 Better Life Index found that the U.S. ranks 30th out of 40 countries in terms of time devoted to leisure and personal care.”).

13 Robert D. Putnam, Bowling Alone (2000).

14 Kathryn Vasel, “Google Will Give Every Employee $1,000 to WFH. Its Head of Wellness Explains Why,” CNN, June 4, 2020 (“For us to be able to provide resources for Googlers to set up the most productive workstation at home . . . is really important.”).

END FOOTNOTES

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