THOUSANDS OF homeowners who run businesses from their houses would be the beneficiaries of a new legislative effort on Capitol Hill to redefine and broaden the tax deductibility of office-in-the-home expenses.
Spearheaded by Sen. Christopher S. "Kit" Bond, the Missouri Republican who chairs the Senate Small Business Committee, the push is designed to bring clarity -- and fairness -- to one of the most controversial sections of the federal tax code affecting homeowners.
An estimated 9 million Americans now run businesses from their homes, according to Bond, and roughly 70 percent of those enterprises are owned by women. The Small Business Administration estimates that 300,000 women start home-based businesses every year.
Yet, current federal tax rules make it extremely difficult for many of those owners to take deductions for the legitimate expenses of maintaining their offices, even if the enterprise is based solely in the home and the owner spends substantial amounts of time running the business from the home office.
The Internal Revenue Service allows no deductions whatsoever for business use of homes unless a taxpayer can demonstrate that she or he uses the space "exclusively" and "regularly" as the principal place of business or trade, or uses it as a place to meet or deal with business clients, customers or patients "in the normal course of [the taxpayer's] trade or business."
A key test the IRS sets up for any home-office deduction involves the "relative importance" of the space in the home itself compared with business activities performed elsewhere.
"If the nature of your business requires that you meet or confer with clients or patients, or requires that you deliver goods or services to a customer, the place where that contact occurs must be given great weight in determining where the most important activities are performed," according to IRS' 1996 Publication 587, "Business Use of Your Home."
That test, in turn, disqualifies huge numbers of taxpayers who use their home office as the base of their business for administrative purposes, but who actually perform the bulk of their business services outside the home. For example, the IRS cites the hypothetical case of a salesman who bases his business in his home, regularly using an office there to set up appointments, order product samples and write up orders. The vast bulk of the salesman's time, however, is spent in the field, selling his products to stores and other customers.
Shouldn't he be able to write off the costs of maintaining his office in the home, given the fact that it is the true base location of the business? No way, says the IRS.
"The essence of his business as a salesperson requires him to meet with customers primarily at the customer's place of business," according to the IRS. "The home-office activities, although essential, are less important to [the] business and take less time than the sales activity [the taxpayer] performs when visiting customers. Therefore, his office is not his principal place of business and he cannot deduct expenses for the business use of the home."
The IRS' strict interpretation of this rule was upheld in a 1993 U.S. Supreme Court case involving a physician who based his practice at home and had no other office, but delivered virtually all of his professional services at hospitals.
As a result of that case, "thousands of people who run businesses out of their homes now are precluded from taking deductions," says Senate Small Business Committee spokesman Kenneth Bricker. For home-business owners who do attempt to take deductions, he adds, "they can almost bank on getting an [IRS] audit." To remedy the situation, Senator Bond plans to introduce by mid-February what he calls the "Home-Based Business Fairness Act of 1997," which will, among other provisions, amend the federal code to significantly broaden the availability of the home-office deduction.
"This deduction is very important to the self-employed, and especially to parents raising children while working at home," says Bond. "Self-employed plumbers, home-care nurses, contractors and many others who perform their work outside the home, but whose office is in the home" will be allowed to write off portions of their utility bills, home maintenance bills, depreciation and other expenses attributable to their office space in the home.
Under Bond's bill, homeowners could take deductions provided "the majority of essential day-to-day administrative functions of the office are performed in the home and where there is no other principal place of business to expedite these functions."
The immediate outlook for the bill? Good in the Senate, uncertain in the House, where a companion measure will need to be introduced before action can take place.
Pub Date: 2/02/97