More California Professionals Working from Home in 2020: Deducting for Business Use of a California Residence

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As more and more professionals work from home in 2020, California law firms, securities firms, banks, and other intellectual enterprises are carefully considering the application of IRS Code Sections governing deductible expenses related to qualified business uses of a home (Rev. Proc. 2013-13 (IRS RPR), 2013-6 I.R.B. 478, 2013 WL 161197, IRS Code 26 CFR 601.105).

IRS Revenue Procedure Released in 2013 Provided the Optional Safe Harbor Method: 

In 2013, the IRS released Revenue Procedure 26 CFR 601.105, which provided an optional Safe Harbor Method for taxpayers to use when determining the amount of deductible expenses related to the use of their home for qualified business purposes. Many California law firms, securities firms, banks, and other intellectual enterprises can turn to the Safe Harbor Method as an alternative to calculating, allocating, and substantiating actual expenses as required by § 280A of the Internal Revenue Code. The Safe Harbor Method is effective for any taxable year since 2013.

Safe Harbor Method Simplifies Business Use of Home Deductions for California’s Small Business Owners:

The calculation, allocation, and substantiation of any allowable deductions due to using a part of a residence for business purposes can be overly complicated and troublesome for California’s small business owners. The IRS and the Treasury Department are aware of the issue. The safe harbor method attempts to minimize recordkeeping, administrative, and compliance requirements used to determine allowable deductions under § 280A. Under the safe harbor method, California business owners can determine allowable deductions for business use of their residence by multiplying a predetermined rate (currently $5.00) by the amount of square footage dedicated to business use in their home (not to exceed 300 square feet).  

The Safe Harbor Method is an Alternative to Itemized Deductions for Business Use of a Residence:

The safe harbor method is a replacement of calculating actual expenses under § 280A. If a California small business owner elects a safe harbor deduction, they cannot deduct any actual business expenses due to qualified business use of their home in the same taxable year. Taxpayers using the safe harbor method to determine deductions must still comply with requirements outlined in § 280A regarding determining eligibility to claim a deduction.

Reimbursements & Other Expense Allowance Arrangements for Employees Working from Home:

The safe harbor method does not apply to employees working from a home office if they receive allowances, advances, or reimbursements for business expenses connected to the qualified business use of their home. Reimbursement is required under California Labor Code Section 2802, so California employees working from home should be cautious claiming safe harbor deductions if they have any expense allowance or reimbursement arrangement with their employer (as defined by  § 1.62-2).

More California Professionals Working from Home in 2020:

With more professionals working out of their homes for significant portions of 2020, both employees and employers must consider the financial implications.

If you have questions about California labor law and how employment law protects California workers working from home in 2020, Blumenthal Nordrehaug Bhowmik DeBlouw LLP wants to help. Experienced employment law attorneys are ready to assist you in any one of various law firm offices located in San Diego, San Francisco, Sacramento, Los Angeles, Riverside, and Chicago.