Home Office Deductions and Accountable Plans

Key Points

  • The Tax Cuts and Jobs Act eliminated the ability for W-2 employees to claim business expenses on their tax returns.
  • Accountable plans allow business owners to provide tax-free reimbursements to employees for home expenses and take a qualifying business deduction for the expenses.
  • Accountable plans must meet three requirements.
  • Business owners who file Schedule C can’t receive tax-free reimbursements for home office expenses and claim the home office deduction.

Table of Contents

  1. What is an Accountable Plan?
  2. What are the Basic Rules for Implementing an Accountable Plan?
  3. How Does an Accountable Plan Work with the Home Office Deduction?
  4. Summary

Over the past few years, the business world has seen a major shift to a remote workforce. Pre-pandemic, 17% of the US workforce held remote positions. This number jumped up to 44% during the pandemic, with many employers continuing to support a remote workforce.

While you may have never heard of the term “accountable plan, ” the concept is not new. It has been a longstanding practice within the Internal Revenue Service (IRS) regulations in the United States. The guidelines for accountable plans are outlined in Section 62(c) of the Internal Revenue Code and are part of the broader framework for the tax treatment of employee business expenses.

Whether you are reimbursing yourself for the use of your home office or your employees, it’s important that you have the proper controls in place, one of which is an accountable plan. In this article, we’ll cover everything you need to know about accountable plans for home office expenses.

1. What is an Accountable Plan?

Employers that are now offering or requiring employees to maintain a separate home office are providing reimbursements for general expenses through accountable plans. An accountable plan is a reimbursement program designed to pay employees back for expenses that relate to conducting their jobs.

Accountable plans outline specific guidelines for what qualifies a reimbursement and how the reimbursement process is handled. With the right policies and procedures in place, reimbursement for home office expenses is non-taxable to the employee and deductible as a qualifying business expense for the employer. Accountable plan reimbursement tax benefits also extend to S-Corporation owners who are on payroll as employees.

2. What are the Basic Rules for Implementing an Accountable Plan?

When implementing an accountable plan, there are three standard rules that employers need to follow. If any of these standards are not met, the IRS can consider the expenses nonaccountable, creating taxable compensation for your employees. In addition, nonaccountable expenses are not qualifying business expenses.

Rule #1: Expenses Must Have a Business Connection

Expenses reimbursed through accountable plans must be related to the business.

Examples of legitimate business expenses:

  • Travel Expenses:
    • Airfare or other transportation costs for business-related trips.
    • Lodging expenses while on business travel.
    • Meals incurred during business travel (subject to certain limitations).
  • Vehicle Expenses:
    • Business-related mileage for personal vehicles.
    • Parking and toll fees associated with business travel.
  • Meals:
    • Meals with clients
    • Meals with business associates.
  • Professional Development:
    • Conferences
    • Workshops
    • Seminars
  • Home Office Expenses:
    • Utilities
    • Rent
    • Mortgage interest
    • HOA
    • Home Insurance
    • Real estate taxes
    • Home office equipment purchase and repairs
  • Business Supplies:
    • Office Supplies
    • Equipment
    • Tools
  • Communication Expenses:
    • Phone
    • Internet expenses
    • Online communication subscriptions
  • Education and Training:
    • Tuition
    • Fees
    • Books and other reading materials
  • Professional Fees:
    • Accounting
    • Legal
    • Consulting
  • Other legitimate business expenses that are necessary for carrying out the individual’s duties or responsibilities.

These expenses must be paid by the employee while engaging in services for the company. For example, a training class in a completely unrelated industry would not be reimbursable.

Ways to determine the reimbursable percentage

There are two most common ways to determine the reimbursable percentage of these costs: the square footage method and the number of rooms method.

  • Square Footage Method:
    • Description: The square footage method involves calculating the percentage of your home used exclusively for business by comparing the square footage of your home office to the total square footage of your entire home.
    • Calculation:
      • Measure the total square footage of your home.
      • Measure the square footage of the area exclusively used for your home office.
      • Divide the square footage of the home office by the total square footage of the home to get the percentage.
    • Example:
      • If your home office is 150 square feet, and your home is 2,000 square feet in total, then the calculation would be 150 / 2,000 = 0.075 or 7.5%.
      • This would result in a reimbursement of 7.5 % for qualifying home office expenses.
  • Number of Rooms Method:
    • Description: The number of rooms method involves determining the percentage of your home used for business based on the number of rooms dedicated to business activities compared to the total number of rooms in your home.
    • Calculation:
      • Count all the rooms in your home.
      • Count the rooms exclusively used for business purposes.
      • Divide the number of rooms used for business by the total number of rooms in the home to get the percentage.
    • Example:
      • If you have a dedicated home office and a total of 8 rooms in your home, then the calculation would be 1 / 8 = 0.125 or 12.5%.
      • This would result in a reimbursement of 12.5 % for qualifying home office expenses.

Considerations

Regardless of the method you choose, you need to consider a few important factors:

  • Exclusive and Regular Use: In both methods, the portion of the home used for business must be used exclusively and regularly for business activities to qualify for the home office deduction.
  • Documentation: Maintain accurate documentation, such as measurements or room counts, to support your calculations in case of an audit.
  • Business connection: If you, as a business owner or an employee, put a deck onto the house, none of that is reimbursable because it doesn’t relate to the business.
  • Reasonableness: Claiming 80% of the home that is used for the home office isn’t reasonable and can result in issues with the IRS. Consider adding a limit of 20% to 30%. Any limitations should be clearly established in your accountable plan documentation.

Rule #2: Expenses Must Go Through Standardized Procedures

The next rule is that your business must have adequate accounting of expenses, such as through standardized policies and procedures. You can’t make ‘exceptions’ for certain expenses of one employee and not the other, including yourself, if you are a shareholder of an S-Corporation. Your policies need to be standardized and firm. Here are some standardized procedures to consider adding to your accountable plan:

  • Reimbursements are issued within 60 days. Any expense dated past 60 days will not be reimbursed.
  • Employees need to substantiate their reimbursement claims through receipts, invoices, and bills.
  • Employees need to prove the underlying business purpose of the expense.
  • Reimbursements are only issued once documentation has been provided, and a manager has approved the expense.
  • For expenses that are both personal and business-related, employees must provide documentation for the square footage of the home office.

Even though the IRS does not require accountable plans to be in writing, it can help reduce confusion for both your payroll processor and employees to have a tangible copy of policies. Consider drafting a formal accountable plan document and requiring an employee to read and agree to the terms and conditions.

This can help prevent disagreements on what is reimbursable and prove to the IRS that you have defined policies and procedures. The inability to back up reimbursements can lead to the disallowance of expenses, which is not ideal for both you and your employees.

Rule #3: Excess Reimbursements Must be Refunded

The last rule is that excess reimbursements must be refunded to the employer in a timely manner. This is common for accountable plans that issue reoccurring reimbursements. For example, if your employee shows that utilities and home office expenses are usually $200 each month, you might choose to issue a recurring reimbursement.

If expenses actually turned out to be $150 for that month, your employee needs to reimburse the company in a timely manner. This is where proper documentation comes into play. The IRS defines a reasonable period as 120 days. If you miss this deadline, you might face noncompliance with accountable plan regulations and disallowance of the tax-free payment.  

To ensure compliance with reimbursement regulations, it can be helpful to pay reimbursements only once your business receives documentation. Although it can be easier to issue recurring reimbursements, it can land your business in the hot seat with the IRS if employees don’t refund excess payments.

3. How Does an Accountable Plan Work with the Home Office Deduction?

Accountable plans are different from the home office deduction claimed on Schedule C. The home office deduction applies to self-employed individuals who use an office in their home to conduct business. On the contrary, accountable plan reimbursements apply to employees, including shareholders of an S-Corporation, who conduct business for the entity paying them salaries. W-2 employees with no other business can’t claim the home office deduction but can receive accountable plan reimbursements.

You aren’t allowed to double dip on the home office deduction and accountable plan reimbursements for home office expenses. In many cases, businesses that are offering accountable plans aren’t set up as a sole proprietorship or single-member LLC that files on Schedule C. Owners with pass-through entities, like a partnership or S-Corporation, aren’t allowed to claim the home office deduction.

A partner may be able to deduct unreimbursed partnership expenses (UPE). If these expenses are deductible, they are deducted directly on Schedule E with the notation “UPE” and offset the distributive share of income, which is also reported on Schedule E.

If you are a Schedule C filer, you cannot take tax-free reimbursements under an accountable plan and use the same expenses to claim the home office deduction. It’s either one or the other.

4. Summary

Is your business considering offering home office reimbursements? If so, it’s important that you have a written accountable plan in place to maintain compliance with the IRS, streamline reimbursements, and provide tax-free reimbursements to employees. For more accounting and tax tips and tricks, check out our other articles.


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