Employee at one of our locations wants to move to a different state for 2 years and has rented a home which includes a home office, which he will work remotely from. Employer has agreed to pay the rent on this rental and call it an office expense. Are there any tax loopholes that would make this legal? Or any way of splitting it up where they could call half of it compensation and the other half would just be a company expense or reimbursement? Either way, the company will be paying the rent directly to the landlord. (United States)
Employee housing benefits can be non-taxable to employees if all three of these conditions are met:
- The housing is provided on the property owned by the business or employer
- The housing is provided for the convenience of the employer. The employer must have a "substantial business reason" for this, such as a remote work location.
- The employee must accept housing as a condition of employment. A condition of employment is an agreement at the beginning of employment by both employer and employee.
Some examples of housing that meets the criteria and are not taxable to the employee include:
- Fishing employees who live on a boat provided by the company
- A construction employee who works at a remote location that has no other housing available
- A live-in nanny who must care for children at all hours
The condition of employment requirement means the employee can't perform the job without staying on your property.
Since you state "[the employee] wants to move to a different state" it suggests this is not "for the convenience of the employer" and therefore this benefit would be taxable to the employee.
Separately, the employee will not be able to deduct the home office expense on their taxes because they are an employee. See page 4, Publication 587
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. Refer to Publication 535, Business Expense
Your reimbursement policy should apply to all employees (e.g., a travel policy) and not some singled-out individual.
Even if you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses for travel, a move (which you mention) is not travel.
You should always seek advice from a qualified tax professional who can consider details particular to your circumstance. This is not intended to be tax advice.