Opportunity for Congress and Mr. Obama: Fix the Home Office Tax Deduction

ASHI congratulates President-elect Obama on a  hard-fought victory and wishes him great success in his presidency. We wish the same for the victorious members of the U.S. House and Senate.

Just that quickly, the campaign of 2008 is ended.

We turn to the future, to the pressing business at hand for the next president and the 111th Congress.

ASHI lobbies Congress and the administration on a host of issues that impact the daily lives, operations, market opportunities and profitability of ASHI members.

Most of ASHI’s activities apply specifically, solely to home inspection and nothing else. ASHI is the voice of home inspection in Washington, D.C.

But we also know that the large majority of ASHI members are small businesses. They share common problems and concerns with other industries dominated by small businesses.

In that vein, ASHI urges the new Congress and new administration to develop quickly an aggressive agenda to help small businesses grow, flourish, prosper.    
This article will focus on an issue that ASHI would like to see the White House and the Hill resolve in 2009: the need for a reliable home office tax deduction in the tax code.     

At press time, the agenda for President Obama’s first 100 days is already taking shape. Based on discussions inside the Washington Beltway, we expect the first 100 days to center around six urgent issues.

One of those issues is tax policy.

ASHI is telling leading congressional staffers that the home office tax deduction should be part of a tax package to help small businesses. This issue resonates across the small business component of the U.S. economy, which generates $102 billion in revenue annually for the economy.

Fifty-three percent of America’s small businesses are home-based and potentially impacted by the home office deduction.

Many ASHI members operate from offices in their homes. Their offices should be fully eligible for reliable office deductions against business income, as is the case for large non-residential businesses. 

The U.S. tax code allows qualified small businesses a home office tax deduction if a portion of the home is used as a principal place of business or as a space to meet with clients. Yet, the existing rules for home office deductions are anything but reliable, consistent or easy to apply. The rules require estimates of use, type and exclusivity of use and have unclear definitions as to eligibility. There are concerns raised by occasional personal use, which can eliminate the deduction altogether.   
 
In the end, small business owners are often unsure whether their claimed home office deductions might lead to a nasty and expensive dispute with the most-intimidating Internal Revenue Service.   
 
Tax experts have testified before Congress that half of all businesses that would be eligible for the deduction do not use it due to the complexity of the rules or fear that using the deduction might trigger an audit.  

The Small Business Administration hears so many complaints about the home office deduction that it designated the provision as one of its top ten Regulatory Review and Reform (R3) Initiatives for 2008.

Congress appears to be on the cusp of recognizing the problem and addressing it.

The Home Office Tax Deduction Simplification and Improvement Act

Sens. Olympia Snowe (R-ME) and Kent Conrad (D-ND) have introduced S3371, the Home Office Tax Deduction Simplification and Improvement Act. A companion bill, HR7074, has been introduced in the House by Rep. Charles Gonzalez (D-TX).

The legislation would create a standard home office tax deduction. It would establish a relatively simple method for determining the deduction by multiplying a standard rate by the square footage of property used as a home office.

The bills would also require the IRS to recognize separately expenditures allocated to several types of expenses in order to differentiate among real estate taxes, mortgage interest and depreciation.

To reflect business reality in which consultants do business with clients via the Internet or telephone rather than in person, the legislation would allow the deduction if the taxpayer uses the home to deal with clients, even if the clients are not physically present.

Further, the bills would allow for de minimis use of business space for personal activities so that taxpayers would not lose their ability to reliably claim the deduction on this basis.

The last days of the lame duck 110th Congress will not provide the time needed to work on Home Office Tax Deduction Simplification and Improvement Act. However, the new president and the new 111th Congress, which will convene in January, will have a splendid opportunity to enact such a reform.

ASHI strongly encourages them to do so and is making the case in its private meetings with Hill staff.

ASHI urges its members to make the same cases to their elected representatives in the U.S. House and Senate.