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Micro-Business Owners Want Changes To The Home Office Deduction
By Suzanne Martin
Ask many self-employed business owners about the home office deduction and you’ll hear groans of frustration. That’s what the NASE heard when it surveyed association members last year.
The complaints about the deduction that members voiced to the NASE are familiar and valid: The forms and instructions are too complicated. The paperwork requires too much recordkeeping and takes too much time to complete. There is fear that claiming the deduction will trigger an IRS audit. All of these obstacles cause many home-based business owners to avoid the write-off altogether.
It shouldn’t be so difficult for legitimate home-based businesses to claim a legitimate tax deduction.
The U.S. Small Business Administration (SBA) reports that about half of all U.S. businesses are home based. America’s home-based sole proprietors who take the home office deduction generate $102 billion in annual revenue, states a study released last year by the SBA’s Office of Advocacy. Yet many of those home-based businesses face huge hurdles in taking the home office deduction.
To help ease the tax reporting burden for micro-business owners who can claim the home office deduction, the NASE is advocating for a standard home office deduction of $2,500. The solution is simple and straightforward.
To claim the flat-rate deduction, home businesses would still have to meet the requirements of exclusive and regular use of their home offices, as currently defined by the IRS. But instead of spending hours completing complicated, confusing tax forms, these business owners could opt for a standard deduction of $2,500.
Here’s how the flat-rate deduction could solve the problems surrounding the current home office write-off – and put money in your pocket.
Easing The Burden
Last year, an online survey of NASE Members who operated home offices found that almost 40 percent take the home office deduction, but not without headaches.
IRS Form 8829, Expenses for Business Use of Your Home, is required for sole proprietors who take a deduction for expenses related to the use of a home office. And the form is a bear to complete, as NASE Member Leo Pinson can attest.
Pinson runs his business, Building Blocks Consulting, from his home in Washington, D.C. He completes Form 8829 and takes the home office deduction.
“It’s not easy,” Pinson says. “I have to look up the floor ratio I use from a prior [tax] return or from my mortgage papers. There are additional questions that require research, such as expenses for upkeep, equipment, consumables, etc.”
Pinson isn’t alone. In the NASE survey, 39 percent of respondents who did not take the home office deduction said that the paperwork required is too burdensome, completing it is too time consuming, and the form and instructions are too complex.
The standard deduction supported by the NASE could make those irksome forms disappear. The flat-rate deduction would not require any calculations on the size of the home office or on the percentage of housing expenses related to the home office. Micro-business owners that choose to take the flat-rate deduction would simply check a box on Form 8829 stating that they are taking the standard deduction and not itemizing their expenses.
“That change would save micro-business owners significant time and recordkeeping hassles,” says Kristie Darien, executive director of the NASE Legislative Office in Washington, D.C.
“There’s a very real need to simplify the home office deduction. Micro-business owners that qualify for this deduction shouldn’t be prohibited from taking it because the forms are confusing and the paperwork takes hours to complete. There needs to be a straightforward way to claim the deduction. An optional flat-rate write-off of $2,500 would be fair and would solve the problem.”
NASE Member Serra Scannell agrees. Scannell owns Pristine Painting, an interior and exterior painting business in Lemoore, Calif. Although she runs her business from a home office and is entitled to the deduction, she doesn’t take the write-off.
She’s not the only one. The NASE survey found that more than a third (35.5 percent) of members with home offices didn’t take the deduction either. For many, it was easier to forfeit the legitimate tax deduction than to spend valuable business hours wrestling with the tax code.
“The paperwork required is too burdensome and time consuming,” explains Scannell. “I am so busy doing the technical part of my business that some of the paperwork or tax stuff can’t be addressed. The tax side should be simplified as much as possible for small-business owners.”
Saving Taxpayers’ Dollars
Given the option of a standard $2,500 home office deduction without the need for all of the paperwork, Scannell says she’d take the deduction.
And taking the deduction could put more money in Scannell’s pocket, says NASE National Tax Advisor Keith Hall, a certified public accountant (CPA).
“By taking the home office deduction, you not only reduce the amount of income tax you owe, but you also reduce the amount of self-employment tax that you owe,” Hall explains. “And self-employment taxes run 15.3 percent.”
For example, if the $2,500 flat-rate deduction were available, a micro-business owner that qualified for a home office deduction could save $382.50 (15.3 percent of $2,500) on self-employment taxes by taking the write-off.
“For a self-employed person like Serra Scannell who doesn’t currently take the deduction because it’s such a hassle, that’s an extra $382.50 in her pocket,” says Hall. “That’s the beauty of a flat-rate, standard home office deduction. No fighting with paperwork. No time-consuming tax calculations.”
NASE Member Keith Gardner sees the advantage of a flat $2,500 home office deduction. He owns Keith’s Custom Painting in Las Vegas, Nev., where he does drywall repairs and painting. He runs his business from a home office, but doesn’t currently take the legitimate deduction.
“The form and instructions are too complex,” says Gardner. “I didn’t see where the deduction would help lower my tax bill enough to fill out the form.”
But given the simplicity of a standard write-off, Gardner says he would take the $2,500 home office deduction – and put more money into his hands instead of the hands of Uncle Sam.
Even business owners who currently claim the complicated home office deduction could see a potential upside with a flat $2,500 write-off, says Hall.
“These home-based business owners could save time by not having to research and calculate their home office expenses,” Hall explains. “They wouldn’t have to spend time completing complicated tax forms related to the home office deduction. And as every business owner knows, time is money.”
Reducing Audit Fears
Last year’s study about home-based businesses by the Office of Advocacy of the SBA noted that fear of audits by the IRS causes people to not claim deductions to which they are entitled.
The NASE survey confirmed that finding. Forty-five percent of the members who don’t take the home office deduction said they avoided the write-off because they were concerned that they may be audited by the IRS if they claimed the deduction.
NASE Member William Barker was one of those respondents. He owns Apollonia Business Solutions LLC in Arlington, Va.
“My home office is my company office where all my business accounting is done and stored and where company business is conducted,” says Barker.
Yet he doesn’t take the home office deduction for fear the write-off will expose him to an IRS audit.
“It is difficult to calculate the actual space and allocable utility costs that would apply to my home office,” explains Barker. “Because of the difficulty and ambiguity, I feel it would raise a red flag and be subject to questioning no matter which way one looks at it. With the burden of proof on the business owner, I feel it is not worth the time and potential liability for a miscalculation.”
Clearly there’s a disconnect between
the IRS and home-based business owners when it comes to the home office deduction.
NASE Member Paul Carey feels it too. As owner of Carey Contract Services LLC, he runs his light construction and maintenance company from his home in Greenville, S.C. He qualifies for the home office deduction, but avoids it because he’s concerned it would flag his tax return for an audit.
“Although I have nothing to hide from the IRS … I’m basically a one-man show and do not have time for this kind of nonsense,” Carey says about the threat of an audit. “What little savings I might gain taking the deduction would be offset greatly if I have to take time away from my business [for an audit].”
But Hall, the NASE national tax advisor, says the fear that taking the home office deduction will trigger an audit is unwarranted.
“It is my concerted opinion that there are no IRS red flags surrounding this deduction,” he says.
Still, the current tax forms are difficult to understand and the chances for miscalculations are abundant. Innocent math mistakes and misunderstandings of the instructions can lead to incorrect figures on a form, which in turn could trigger an audit.
A simpler, more straightforward, flat-rate deduction could help erase those opportunities for mistakes and ease the minds of taxpayers who claim the deduction. And that, says Hall, could encourage more home-based businesses to take the write-off they deserve.
Working On A Solution
In its survey, the NASE asked participants if they would give up the forms they currently have to complete to get the deduction and instead opt for a flat-rate home office deduction of $2,500. Fifty-six percent of those who responded answered yes.
It’s clear that home-based business owners are hungry for an easier way to claim the home office deduction. And they’re looking to Congress to make the necessary changes.
“Last year the NASE advocated for changes to the home office deduction,” explains Darien. “But only two bills were introduced which included provisions that would have allowed a standard, flat-rate deduction of $2,500 for home offices. Neither passed.”
But the NASE isn’t giving up. A new Congress started work in January, wiping the legislative slate clean. The NASE wants to get the home office deduction bills introduced again – and passed.
“It’s not right that micro-business owners are missing legitimate tax deductions because they can’t navigate the IRS forms, instructions and paperwork,” says Robert Hughes, NASE president and a certified public accountant (CPA). “They need a fairer, easier system to claim the home office deduction. We’re working to give them that. Congress should do the same.