Prior to adjourning for August recess, Ranking Member of the Senate Committee on Small Business and Entrepreneurship Olympia Snowe (R-Maine) introduced legislation to clarify and simplify one of the tax code’s most complex and underutilized provisions - the home office tax deduction.

Currently, the tax code allows a deduction for home office expenses for self-employed taxpayers and employees who must use their home for business purposes at their employer’s request. However, according to the Internal Revenue Services’ (IRS) Office of Taxpayer Advocate, only 2.7 million of the nearly 20 million Schedule C filers in tax year 2003 took a home office deduction, despite the fact that nearly 8 million taxpayers use one or more rooms in their home for business purposes.

The Home Office Tax Deduction Simplification and Improvement Act of 2008 (S. 3371) directs the Secretary of Treasury to establish an optional standard deduction to encourage greater use of the incentive. The option would not preclude taxpayers currently qualifying for the deduction from continuing to itemize their expenses should they so choose.
The measure would make two critical changes to the current law. First, to reflect an economy in which many business owners conduct business through the Internet or over the phone, the legislation would allow the home office deduction to be taken if the taxpayer uses the home to meet or deal with clients regardless of whether the clients are physically present. Second, the bill would allow for de minimis use of business space for personal activities so that taxpayers would not lose their ability to claim the deduction if they make a personal call or pay a bill online.

NSBA advocates for a simpler tax code and conducted an online poll asking members to speak out about their view of the Home Office Standard Deduction. According to the survey, if offered, 66 percent of the respondents would be more encouraged to take a standard home office deduction rather than itemize their expenses. Of those surveyed only 25 percent currently take the home office deduction when filing their taxes. The fact that so few small business owners are taking the deduction indicates its complexity and ineffectiveness.

NSBA has endorsed a similar measure in the House (H.R. 6214) and plans to lend support to Senator Snowe’s bill. S. 3371 offers taxpayers a simpler, alternative method of calculating the home office deduction. Allowing individuals to take a standard deduction instead of itemizing their return will help to increase compliance and reduce administrative costs for many small businesses. Additionally, if passed, this bill would reduce the paperwork and time spent on tax preparation for entrepreneurs managing their business out of their homes.

Upon introduction, the bill was cosponsored by Sen. Kent Conrad (D-N.D.) and was referred to the Senate Finance Committee.