Utilities – PA DOR Continues Assault on Home Office Deduction
PA Dept. of Revenue’s Revised Onerous Requirement
for Reporting Sales Tax on Utilities
In our March 17, 2015 posting, we discussed that taxpayers who claim a home office deduction would be required to pay sales tax to the Pennsylvania (PA) Department of Revenue (DOR). We pointed out that personal residential use of electric, gas and oil are not subject to PA sales tax. When a taxpayer uses a portion of their personal residence for business purposes (i.e., the home office), the residential usage is transformed to commercial usage. Since commercial usage is subject to PA sales tax, taxpayers claiming the home office would have a PA sales tax liability.
For pre-2018 tax years, to pay the sales tax to PA, taxpayers would simply report the sales tax on line 25 on page two of the PA-40 individual income tax return. The PA DOR recently announced that only residential use tax can be reported on that line.
Initially, the DOR announced that taxpayers claiming a home office would need to register with the DOR for a sales/use tax account to remit the tax and make separate periodic filings with the DOR using the E-Tides system. After an outcry by tax practitioners about this onerous approach, the DOR listened, but unfortunately, decided upon another onerous approach.
Under current guidelines, taxpayers will be asked to contact the DOR’s Bureau of Enforcement, Planning, Analysis and Discovery (EPAD) call center to request a use tax notice. EPAD staff will then generate a notice, which will include key points of reference (Revenue Identification numbers and notice numbers). This information will then enable taxpayers to pay the PA use tax online. The PA phone number is (717) 214-7287, option #1. If the business already has a sales tax license number, it need not separately register for the use tax but instead include the use tax with its sales tax filings.
The details regarding the implementation of this new approach have not been finalized by the DOR, and further details will be announced by the DOR at a later date. For example, the DOR just announced that it will not penalize individuals that continue to use Line 25 to pay use tax on utilities, but encourage everyone to use the EPAD procedure.
Tax Planning Tip: In our September 20, 2018 blog, we discussed the new IRS rules regarding claiming a home office deduction. Effective January 1, 2018, this federal tax deduction has been disallowed as a Schedule A miscellaneous itemized deduction. However, self-employed individuals who file Schedule C or landlords filing Schedule E may be eligible to claim the home office. Taxpayers need to consider the benefit vs. cost of claiming the home office deduction on the PA-40. For example, if a tax professional charges $50 to claim a home office deduction on the PA-40, the taxpayer would need $1,628 in home office expenses simply to cover the tax preparation cost. In addition, the PA DOR may be aggressive in challenging a taxpayer’s right to claim the home office, another factor to consider in terms of dollars and time spent to defend this deduction should the DOR challenge it. For examples of the DOR’s aggressiveness, you should read our February 20, 2018 blog regarding taxpayers claiming unreimbursed employee expenses and our February 6, 2018 blog regarding self-employed audits by the DOR.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution