Home Office Deduction Simplification
The NASE Position:
Increasingly, entrepreneurs are utilizing their home as a primary place of business. Many home-based business owners do not make use of the home office deduction due to the complexity of the criteria they must meet. The NASE believes that the home office deduction must be simplified and expanded to allow home-based businesses to easily utilize the deduction.
Background:
According to research commissioned by the SBA Office of Advocacy, home-based businesses represent 52 percent of all firms and provide 10 percent of the total revenue of the economy. The Congressional Budget Office estimates that nine million of the 17.3 million small businesses in the United States are home-based, and 55 percent are operated by women. Many home businesses are started to provide a secondary income, as evidenced by the fact that sixty-one percent of businesses earning less than $5,000 are home-based.
To qualify for a home office tax deduction, a business owner must use an area of their home regularly and exclusively for business purposes and must meet these conditions:
Use the space as their principal place of business, for a company that generates revenue. Under recent changes in the law, business owners could meet this qualification even if they only perform administrative and managerial functions there and if they have no other fixed principal place of business. Use the space to meet with clients, patients or customers. Use the area exclusively to store inventory or product samples for their business.
To claim the home office tax deduction, business owners complete and file Form 8829. The deduction is based on the square footage used for business compared to the total square footage in the house.
Many home-based business owners prepare their own taxes. Thus, the complexity and paperwork burden of this deduction forces many home-based business owners, who could qualify, to not employ this benefit.
Legislative Activity:
In the 109th Congress, Rep. Lee Terry (R-NE) introduced the Parents’ Tax Relief Act (H.R. 3080), which included a provision that would support those who choose to operate a home business by creating a standard home-office tax deduction. This standard deduction would replace complicated IRS regulations that prevent many home businesses from deducting legitimate expenses. Its companion bill, S.1305, was introduced by Sen. Sam Brownback (R-TX). The NASE supports this legislation and is also working to find a lead cosponsor on stand alone legislation that would allow home-based businesses the option of selecting a standard deduction.
In the 108th Congress, no legislation was introduced dealing with the home office deduction. However, the Small Business Administration held a series of roundtables discussing home-based businesses, the issues they face and their contribution to the national economy.
In the 107th Congress, the Home Office Tax Simplification Act (H.R. 5220) was introduced by Rep. Mac Collins (R-GA) and Rep. Tom Delay (R-TX). The bill would have created a standard $2,500 deduction that home-based business owners could elect to take. The companion bill (S.945) was introduced in the Senate by Sen. Christopher Bond (R-MO).
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