Research Paper on "Home Office Deductions"

Research Paper 23 pages (7025 words) Sources: 20

[EXCERPT] . . . .

Home Office Deductions

Equity and Fairness

Appropriate Government Revenues

Certainty

Simplicity

Minimum Tax Gap

Convenience of Payment

Economic Growth and Efficiency

Transparency and Visibility

Possible Home Office Deduction Improvements

Home Office Deductions

For those who are self-employed or otherwise work from home, home office deductions can save money on federal income taxes. However, many people do not understand all of the nuances that surround these deductions. That can lead them to either miss deductions that they could have taken or take deductions that were not really legal for them to take. The first scenario will just cause them to lose some money in taxes. The second scenario could get them into trouble with the IRS, especially if they get audited and/or if they have been taking improper deductions (either deceitfully or out of ignorance) for some time. Being able to deduct some of the costs of having a home business does not mean that a person can deduct everything, though, and not everyone will qualify.

In order to qualify for a home office deduction, tax law requirements must be specifically met. Once that has been established, one has to determine how much of his or her residence is being used exclusively for a home-based business, whether that is the case all year round or only for a portion of the year, and how many qualifying expenses (and in what portions) can be deducted based on that information.

A large number of people who are technically eligible for the home office deduction do not take it, because they are too confused by the requirements. The calculations are complicated, and the directions for determining how much of a deduction can be taken take up more than 35 pages. The result of that confusing and large number of pages means that many home-based businesses miss out on their deductions, even though they are lawfully entitled to take them.

A survey that was conducted in 2006, for example, indicated that only 15% of the home business owners who responded had an adequate understanding of the rules.

That occurred despite the fact that more than 75% of the respondents said that their business would legally qualify for the deduction. The survey was taken by the National Federation of Independent Business Research Foundation. There are several key reasons cited when home-based business owners are asked why they do not take the deduction to which they may be legally entitled. These reasons include the complexity of the instructions and the forms, the strict requirements and rules that have to be followed, and the fear of their home office deductions triggering a flag that would result in an IRS audit.

In 2009, the Small Business Administration's Office of Advocacy placed the simplification of this deduction at the top of its published tax reform recommendations.

The proposals that it created stated that taxpayers would have the option to avoid the calculation method they found so daunting and take a standard home office tax deduction, instead. The rationale behind that simplification recommendation was that the deduction would be easier for many people to take, which would save both money and time for the IRS and also for the taxpayers. There have been several bills that have also been introduced to Congress in an effort to see the home office tax credit deduction simplified.

These have included H.R. 3615 (111th Congress) and H.R. 3056 (111th Congress).

These bills would have created a standard home office deduction of $1,500 and relaxed the requirements for the physical presence of clients in the home office in order for the deduction to be legal, respectively.

The second of those bills would also relax the exclusive use requirements, meaning that the home office could also be used for other things and still qualify for some of the deduction that would have previously only been given to offices with exclusive use. While it is unlikely that the IRS would come to a person's home in order to verify that he or she was using a specific portion of that home exclusively for an office, claiming an office that does not fit realistic guidelines for size and other factors can trigger an audit - something that the majority of taxpayers would be happy to avoid, even if that meant losing out on deductions for which they might have been eligible. While a standard home office deduction does not yet exist, evaluating one and comparing it to the current, confusing way of addressing the home office deduction is significant.

Equity and Fairness

Many issues must be considered where a home office tax deduction is concerned, and one of these issues is the concept of equity and fairness. It is important to ask oneself whether taxpayers who are similarly situated financially are actually being taxed in a similar manner. If they are not, then there is a serious discrepancy which should be addressed. Where taxpayers live and what kind of income level they have can have different effects, and these should also be considered in order to make sure that the tax system for home office deductions is truly equitable. Overall, a standard deduction would be one of the best ways to increase fairness for every small business.

For example, corporations are capable of fully deducting their operating costs in the majority of cases, and home-based businesses are not able to do this.

By changing that and allowing home-based businesses to deduct all of their operating costs, more fairness would be built into the system.

Right now, there are some equitable areas of the tax code as it relates to home-based businesses, and there are some areas where there is a serious lack of equity. Because that is the case, ideas like the standard home office deduction have been proposed. Unfortunately, these ideas have not caught on. Some home business owners use tax return software to determine whether they can take a deduction for a home office, but not all home business owners can afford this - and many of them cannot afford a tax professional, either. With that being the case, they must rely on instructions provided through the IRS for guidelines as to whether they can take the home office deduction.

When it comes to determining equity and fairness with a home office deduction, it is important for the business owner to clearly understand what constitutes a home office. Many people spend time setting up their business and creating a workspace in their home from which they can use their computer and telephone, and organize their paperwork so that they can keep their business moving.

If they are using that space for anything else, or if they do not meet the rest of the guidelines set out by the IRS, they will not be eligible to take the home office tax deduction. More often than not, however, it is not about people who cannot take the deduction doing so anyway. Instead, it is about people who are eligible to take the deduction not being aware that they can do so because of the confusing guidelines with which they are presented. By simplifying the guidelines and rules, or allowing for a standard home office deduction, the IRS could provide help to millions of people who own home-based businesses throughout the United States.

Appropriate Government Revenues

One of the concerns with the home office deduction is the revenue. The government is getting a lot of money from home business owners who are paying more in taxes because they are not taking the deductions to which they are entitled for their home offices. However, if there was a standard deduction available instead of only the complicated way of taking the deduction that is currently available, it is possible that the government would make the same amount or even more than before. Yes, people would take the deduction, but some of them who are taking too much of a deduction would no longer be doing that. The process would be simpler, and that would allow more people to take the standard deduction - which could add up to less than the incorrect deductions that were being taken in the past.

That is not the only issue that would help government revenue.

Another way that government revenue would be increased by the use of a standard home office deduction would be based on the fact that there would be fewer IRS workers needed to ensure that the deductions were being correctly taken. Paying fewer people means more revenue for the IRS overall. Between the benefits for the taxpayers and the benefits for the IRS, it is easy to see why a standard deduction may be better than the current method. However, right now the current method is what is available, and a large majority of taxpayers get that method wrong when they file their taxes, because they do not understand how to properly take the deduction and for what kinds and levels of deductions they actually qualify.

Paying taxes to the government is… READ MORE

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