I recently received an email from one of my larger farm clients that has several employees who work from home. The employees expressed concern over the loss of the miscellaneous itemized deductions — home office expenses. This made me realize that the new tax laws are still causing some confusion. Clarifying the changes to Schedule A will help partners and owners understand how to account for certain expenses.
In the past, you were able to claim a miscellaneous itemized deduction (subject to 2 percent adjusted gross income floor) for the following:
- Employee business expenses (mileage)
- Uniforms and work clothes
- Professional dues and union dues
- Home office expenses
- Tools supplied for taxpayer’s work
These and a few other expenses are no longer deductible, including the moving expense deduction for most taxpayers (other than U.S. military on active duty).
As an employee, it may seem like the IRS took away tremendous tax savings. However, according to the Metric Accountants if you look into the numbers closely, the standard deduction (if you do not itemize) is more than double the amount under the prior tax law. In addition, for the majority of people, the new tax brackets lowered the effective tax rates.
For an employee filing Married Jointly, the correct question is: Would my itemized deductions be more than the increased standard deduction if I included the disallowed miscellaneous itemized deduction? The increased standard deduction will be greater in the majority of cases.
If the employer deems it a substantial issue for its employees, they could set up a plan to reimburse the employees for certain business expenses. The cost versus benefit of setting up an accountable plan must be closely examined. In the end, maybe a simple gross-up to compensation is the easier route to make the employee whole.
Unlike employees, the owners of businesses taxed as partnerships can still deduct unreimbursed expenses. This is called Unreimbursed Partnership Expenses, or UPE. UPE is an adjustment on the owner’s tax return on the same schedule the partnership K-1 is reported. One benefit of UPE is that it reduces the self-employment income and subsequently the self-employment tax.
One final thought: Agribusinesses will have to address unreimbursed employee expenses as they utilize work-from-home employees more often. As the agricultural labor shortage continues, this issue may be the difference between attracting and keeping high quality employees and losing them.
Editor’s Note: Tax Columnist Rod Mauszycki is a CPA and tax partner with the accounting firm of CliftonLarsonAllen, in Minneapolis, Minnesota. Send questions to firstname.lastname@example.org