Will Congress Simplify the Home Office Deduction?

Posted by: John Tozzi on October 23, 2009

One of the most baffling tax tasks many entrepreneurs face is claiming the home-office deduction. It involves calculating how much of the residence is used for exclusively for business, how much of the year it is used, and then deducting a percentage of expenses based on that. The instructions are 35 pages long. Lots of self-employed home-based workers who qualify don’t claim home-office deductions because the process is so complicated. Many also consider it an audit flag because of the potential for people falsely claiming home offices (though tax pros say that’s not the case).

Fixing this would save millions of home-based business owners time and money. At least six bills pending in Congress would simplify this. They would give home-based business owners the option to take a standard home office deduction of $1,500 or some figure to be set by the Treasury. (If taxpayers think they deserve a bigger deduction, they’d still have the option of calculating it the old way.)

Lawmakers, both Republicans and Democrats, introduced four similar bills last year, but they went nowhere. Like the tax self-employed workers pay on health care, this is an issue that affects a lot of small business owners with relatively little collective lobbying power.

The change is at the top of the tax reform recommendations recently published by the SBA’s Office of Advocacy. The latest efforts to simplify the home office deduction were introduced in the last month, accompanied by press releases from lawmakers. The change would make tax time easier for the growing number of people working out of their homes, particularly many who have lost their jobs in this recession. Let’s see if Congress follows through.

Reader Comments

Jim Campbell

October 23, 2009 1:42 PM

The work at home entrepreneur is a model that's beginning to boom. The benefits to all (business person, customers, economy, environment, etc.) are and will become much more impacting as time goes on. Certainly a $1,500 would be too low as an across the board deduction option. Simplifying the process will be of great assistance. If you're searching for a vehicle for yourself, visit http://www.LikeSoup.com

Bob Mont

October 23, 2009 9:47 PM

I'm an attorney (hope you won't hold that against me) and I work with small business owners. Our society has become so complicated with rules and regulations from government agencies that it stimies or reduces the ability of people with good busines ideas in proceeding forward. They often have to look to many different so called experts to help with this issue or that. Anything that can be done to simplify the startup or operation of a business, including simplying the home office deduction would be a welcome benefit to every small business person. In starting out people are often stopped in the beginning with just the basic issue of finding the availability of a business name and deciding whether or not they have to register the name. There's a free table or tool to help small business people in the US check the availability of business names. You can check it out at this link: http://incsource101.com/LLC/registeringabusinessname.html

FJ

October 25, 2009 12:12 AM

Jim C., in addition to entrepreneurs and the self employed, many companies and some government agencies require regular payroll employees to work out of their home in situations where the company/agency need local representation but cannot justify a local office. The $1500 proposed is better than the present situation and should be available to those who take the standard deduction, as about 70% of taxpayers do.

My wife has maintained a home office required for her government job for about 20 years - we have never messed with the home office deduction.

Bruce Stewart

October 25, 2009 11:31 PM

I don't claim any home office deduction although I work from home. My office is part of the house I enjoy being in and the decor is relaxing and comfortable. My equipment is mostly limited to a laptop (which I need anyway) and a printer and scanner. Last year my upper tax bracket was 13% and this year I am hoping to get into the 20% tax bracket. I believe in keeping things as simple as possible and when filing taxes opt for the general deduction rather than trying to list all my (business) expenses.

steve the plumber

October 28, 2009 12:02 PM

Will Congress Simplify the Home Office Deduction?

Thanks for sharing

thala taperman rolnick

May 19, 2011 8:42 AM

They need to get the home office deduction legislation right. A simplified calculation does not solve the problem. Only Senator Snowe's bill allows any personal use and changes the definition of "meeting" to include non physical presence. All the other bills will do is to make small businesses believe they can deduction an office that they really don't qualify for,

MJMCPA1

May 27, 2011 5:42 AM

A very important fact is that if you do get audited by the IRS and do NOT claim an office in home expense on your schedule C the auditor can or will force you to deduct your "commuting" mileage from your total business mileage. If you don't file the form, your mileage from your home to your first stop of the day and the mileage from your last stop of the day to your home, can not be claimed as deductible business mileage. If you do file the form, all of your miles are business miles. I can make a big difference - cost my client about $3,000 in additional income and self-employment tax. Don't forget - your net Sch. C business income is taxed for income tax purposes at whatever bracket you are in AND for Self-employment tax purposes at @ 15%. Add in the State income taxes & with a working spouse, your Sch. C income can be taxed at over 40%. That's what happened to my client. His wife had a W-2 of $60,000, so his Sch C income was taxed at 25% + 15% + 4.5% for a total of 44.5%!!

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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