You may have read two earlier Tips, where I discussed two different issues, viz.:
1. Are Uber, Lyft and other delivery services of people or products considered independent contractors (IC) or employees (EE)?
2. Can a taxpayer deduct the cost, for Federal income tax purposes, of the expenses incurred in operating an Office in the Home (OH) for business/profit purposes?
These two issues appear to be unrelated in most settings. However, recent activity addressing both of these issues has been in the news. Such activity has resulted in an overlap and interdependence of these issues in many instances.
It helps to back up a moment and quickly state the position on both of these issues, followed by demonstrating how these issues overlap and impact each other.
First Issue: IC or EE?
In a prior Tip, the issue addressed was whether a worker was an EE or IC. This is no small issue; the decision impacts millions of people in the US and billions of dollars. If, for example, a worker was held to be an EE, the employer may be responsible for Federal and state tax withholding, FICA taxes, unemployment taxes, retirement payments, medical insurance, vacation pay, and much more. The employer might not be responsible for most of the items noted, if the worker is deemed to be an IC.
In this prior Tip, there was an examination of a recent Case, Dynamex, a decision from the state of California. The Court concluded the drivers, delivering items, should be classified as EEs. This decision has huge implications to all type of drivers, be they delivering goods as in the case of Dynamex or be they transporting people, such as undertaken by Uber, Lyft, et al. Following this decision, of Dynamex, California passed legislation (AB 5) that supports the position that workers in the position of Dynamex (Amazon, DoorDash, etc.) will be treated as EEs, not IC.
The earlier mentioned Tip on this issue (and additional articles on this subject by this author and Libbi Levine Segev) concluded that this decision in California (along with similar decisions in NY, NJ, etc.) support the EE classification of such delivery services. This, in turn, could generate tax revenue for the governmental bodies in questions; but, it may prove to be the death knell for Uber, Lyft, et al in those jurisdictions that classify this type of worker as an EE. In fact, both Uber and Lyft gave notice in California that they were discontinuing operations in California. (This position was withdrawn, because the California Appellate Court granted an emergency stay of execution on this classification, pending an appeal of this issue.)
Second Issue: Deduction or No Deduction for Office in the Home?
The second issue, apparently, on its face, unrelated to the first issue, is whether one working from home can claim a Federal income tax deduction for the use of part of the home for conducting business in the home.
The resolution of this issue depends on a number of Internal Revenue Code sections that address when expenses for business can be deducted on the tax return of the worker. (These Code Sections have been discussed by these authors, Levine and Segev, in other articles, such as one that will be published this year in the Real Estate Law Journal.) In summary, the relevant Code Sections are 67 (limiting itemized deductions), 162 (addressing the deduction of business expenses, 183 (dealing with non-business, hobby loss type activities) and 280A (placing limits on deductions for an office in the home (OH). The key point for this Tip is that even if expenses might be business connected, the Tax Cuts and Jobs Act of 2017 added a provision that “miscellaneous itemized deductions” are not deductible any longer, at least until after 2025. (The OH is in this category of “miscellaneous itemized deductions.”)
Impact of the Two Areas: EE vs IC and OH Expense:
The interplay of these two areas dictates the conclusion:
If a worker is deemed to be an EE and not an IC, the expenses for an Office in the Home are not allowed as a deduction on the tax return of the worker. Thus, not only will workers for companies such as Uber, Lyft, Dynamex, et al not be treated as IC, such workers/EEs will not be able to undertake a deduction for an office in the home. If such workers take calls, undertake paying of expenses, do their accounting for the business, make deposits, and otherwise carryout business functions in the office at home, no deduction will be allowed.
Such workers will face the possible loss of driving for such companies, if the companies pull out from the state. This is the announced positions by Uber and Lyft, among others. Even if the company operates in the state, the drivers will face other limits as EEs, such as the loss of the tax deduction for the office in the home.
Upcoming decisions by the courts and possible legislation will be needed to resolve these issues.
By
Dr. Mark Lee Levine,
Professor, University of Denver