National Small Business Group Urges Passage of McHugh/Schrader Home Office Bill

Press Release

The House Committee on Small Business's Subcommittee on Finance and Tax held a hearing today on "How the Complexity of the Tax Code Hinders Small Business." At the hearing, the National Association of the Self-Employed called for passage of a bill sponsored by Congressmen John M. McHugh (R-NY) and Kurt Schrader (D-OR). Congressman Schrader is Chairman of the Subcommittee. The legislation, H.R. 1509, the Home Office Deduction Simplification Act, is designed to reduce the complexity of the tax code and would provide Americans with the ability to take a standard deduction for home office expenses without utilizing the current, more complex formula.

"Whether it's good times or bad, the tax code has become a true obstacle to efficient business," said Schrader. "In an average year, individuals and companies spend close to $265 billion doing their taxes. And small businesses pay the lion's share of that sum. In fact, entrepreneurs spend an estimated $1,304 per employee, roughly twice the amount that big companies pay. During the hearing we heard that the home office deduction has become so complicated that businesses are afraid to claim it. That is not how we encourage the entrepreneurship that will turn this economy around."

"Today's hearing was another reminder of how critical simplifying our tax code is to the financial health of small business and I applaud Chairman Schrader for holding the hearing to identify productive solutions. Across our country, small businesses are the backbone of our economy, and this time of economic crisis demands that we provide them with the support they need to continue to grow and thrive. Historically, millions of Americans who are self-employed or work from home do not utilize the home office deduction because of its complexity, and this bill is a bipartisan solution to that problem. While many bills in recent years have made the tax code more complicated - this bill achieves the opposite effect and allows taxpayers to take a simple deduction without apprehension," said McHugh. "In my Congressional District, there are 66,000 small businesses that could potentially benefit from this simplified tax structure."

In his testimony, Keith Hall, National Tax Advisor, the National Association for the Self-Employed, said: "The home office deduction is a prime example of a provision of the tax code that needs simplification. The forms and instructions are too complicated. The paperwork requires too much recordkeeping and takes too much time to complete. In addition, NASE members expressed a substantial fear that claiming the deduction will trigger an IRS audit. All of these obstacles cause many home-based business owners, who qualify, to avoid the deduction altogether. The creation of a $1,500 standard home office deduction option as proposed in the "Home Office Deduction Simplification Act" (H.R. 1561) would address all of these barriers to utilizing the home office deduction. In fact, we found in a May 2008 online poll that over 60% of those home-based businesses who were not currently employing the home office deduction would do so if they were offered a standard deduction option."

The full video of Mr. Hall's comments is available via You Tube: http://www.youtube.com/watch?v=qugG4BV1hrI&feature=PlayList&p=C38C56FE192D93EB&index=4

America's 27 million American small businesses represent more than 99 percent of all employers, provide 51 percent of private sector employment, and make up 45 percent of the United States' payroll. Small businesses also produce approximately 50 percent of the nation's private, nonfarm GDP. As a result of technological advancements and other significant changes in the economy over the past 40 years, many more small businesses are now able to effectively operate out of the home. According to the Internal Revenue Service (IRS), the home office deduction was taken on 3.3 million self-employed business returns in tax year 2006, an increase of 700,000 from tax year 2002.

However, the IRS reports that "a substantial number of taxpayers with home office expenses are not claiming them on tax returns." According to the IRS, the deduction might be underutilized because "understanding and complying with the rules for deducting home office expenses can be difficult for small business and self-employed taxpayers." This is borne out by an IRS analysis that found almost half of the taxpayers claiming a home office deduction made errors.

The Home Office Deduction Simplification Act would allow eligible individuals to take a standard deduction of $1500 instead of itemizing on their return. Additionally, the deduction would be indexed to the cost of inflation, ensuring that taxpayers receive the full benefit of the home office deduction every year without necessitating further legislation.

The Home Office Deduction Simplification Act was referred to the Committee on Ways and Means for consideration. In addition to the National Association for the Self-Employed, the National Federation of Independent Business and the National Small Business Association, among others, support the legislation.

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