The COVID-19 pandemic has brought about a great deal of changes for Pennsylvanians, with one of the biggest disruptions coming in the workplace. Namely, many taxpayers are now finding themselves working from home, setting up workstations at their kitchen tables or in their home offices.
With remote work becoming commonplace, the Pennsylvania Department of Revenue has received questions from taxpayers who are wondering about the deduction of home office expenses on their 2020 tax returns and wrote this article to answer taxpayers’ questions.
The guidance below pertains mostly to Pennsylvania taxes — not federal taxes. (Some federal guidance can be found here.)
Claiming Home Office Expenses
Pennsylvania Personal Income Tax law permits a taxpayer to claim certain unreimbursed employee business expenses, including a deduction for home office expenses. The deduction is allowable for taxpayers who are temporarily working from home during the COVID-19 pandemic if they meet the qualifications outlined in the section below. However, even if you meet the qualifications, there are other considerations that have to be accounted for when claiming the deduction.
Do You Qualify?
Here are the things you need to consider to determine if you meet the qualifications:
- You may claim a deduction for home office expenses if your employer does not provide a suitable work area OR you are not permitted to report to your normal employer provided work area due to the COVID-19 pandemic.
- You also must answer YES to all three of the following questions in order to qualify for a home office deduction on your Pennsylvania tax return.
- Does your employer require you, as a condition of employment, to maintain a suitable work area away from the employer's premises?
- Is the office or work area the principal place where you perform the duties of your employment?
- Do you use the office or work area regularly to perform the duties of your employment?
- If you answered NO to any of these questions, you may not claim home office or work area expenses.
- There also must be exclusive use of the area for which the home office deduction expense is claimed. In other words, the area cannot be used for any other personal use during the time the home office expense is claimed.
Note: Part-year home office expenses can only be claimed from the date the home use began.
Considerations When Claiming
Claiming the home office deduction has certain consequences that a taxpayer needs to consider:
- You must gather and retain the expense information to claim the deduction (taxes, utilities, insurance, mortgage interest, maintenance, etc.).
- You must file and pay the 6% use tax on the utility expenses claimed as part of the home office deduction (There is an additional 1% local tax if you live in Allegheny County; there is an additional 2% local tax if you live in Philadelphia).
- Once a property is used for business, it retains that status indefinitely and gains on the business use must be reported.
- There is no longer a federal tax deduction allowed. As a result, taxpayers should evaluate if the Pennsylvania deduction is worth it for the net tax saved each year. There also may be tax due in a future year when the house is sold.
Use Tax on Utilities
Although residential use of a property is exempt from sales and use tax on utilities, business use is taxable. If you are claiming that you are using part of your property for a business purpose and you take the home office deduction on your Pennsylvania Income Tax Return (PA-40), a pro-rata portion of utilities (gas, electric, fuel oil, steam heat, etc.) will need to be deducted with other expenses. Since you must be consistent, a taxpayer cannot opt out of taking the utilities expense if the other expenses are deducted.
Use tax on utilities must be paid to the department on Form PA-1. The use tax for business use of a home can no longer be paid on Line 25 of the PA-40 along with the use tax on purchases.
Important: Use tax on the utilities will need to be determined and paid quarterly.
Future Sale of Your Residence
If you do take a home office deduction on your PA-40, you will have to pay Pennsylvania Personal Income Tax on the gain from the sale of your home on the portion of your home that you claimed as a home office.
Example: You claim that 25% of your home was used for your home office and you deducted the appropriate expenses. Then you sell your home and your overall gain from the sale of that home (minus original cost) was $10,000. You would be required to pay PA personal income tax on 25% of that gain ($2,500).
Should You Take the Deduction? We Crunch the Numbers
A taxpayer owns a home and is working from home due to the COVID-19 pandemic from March 2020 until June 30, 2021. The taxpayer later sells the home in 2022.
2020 Tax Year
$150,000 is paid for the home in 2010 and 10% of it is used for a home office in 2020 for 9 months.
- The utilities expense for the year were $4,000. 9 months of that amount is $3,000. The home office portion is $300 ($3,000 x 10%).
- The real estate taxes, mortgage interest paid, homeowner's insurance and maintenance costs for the year is $7,000. 9 months of that amount is $5,250. The home office portion of those expenses is $525 ($5,250 x 10%).
- The home has a useful life of 30 years. If the home were to be depreciated, the yearly depreciation would be $5,000 ($150,000 ÷ 30). The home office portion of the depreciation is $500 ($5,000 x 10%). 9 months of that amount is $375.
- The total of the home office expenses allowable as a deduction is $1,200.
- This deduction is worth $37 ($1,200 x 3.07%) in PA personal income tax. However, use tax of $18 must also be paid on the $300 ($300 x 6%) utilities expense portion deducted.
- The net tax savings for the deduction is $19 ($37 - $18).
2021 Tax Year
For 2021, the home office expenses were the same, but the home office was only used for half the year.
- The total home office expenses for half the year is $800, with a PA personal income tax savings of $25 ($800 x 3.07%)
- Use tax is $12 ($2,000 x 10% x 6%). Therefore, there is only a net savings of $13 ($25 - $12) in taxes.
2022 Tax Year
- If the property is sold in 2022 for $200,000, the net gain would be $50,625 [$200,000 less $149,375 basis ($150,000 - $625 depreciation)].
- The PA tax of $155 would be due on 10% of the gain ($5,062.50 x 3.07%).
- Even though claiming the home office deduction would save $32 total for 2020 and 2021, it would end up resulting in an additional $123 ($155 - $32) in net tax when the home is sold.
Reminder: If you live in either Allegheny County or Philadelphia, you will need to use either the 7% or 8% local tax rates to determine your use tax obligations.
How Do You Report Your Home Office Deduction?
To report the home office deduction, taxpayers must complete the PA-40 Schedule UE. Please refer to the PA Personal Income Tax Guide – Gross Compensation section for additional information.
Taxpayers have a new way to electronically file their Pennsylvania Personal Income Tax returns (PA-40s). Visit mypath.pa.gov to access the Department of Revenue's new, state-only filing option. myPATH is a free, user-friendly system that allows taxpayers to seamlessly file their Pennsylvania Income Tax Return (PA-40) and make income tax payments, as well as offering other services.