Home May Be a Castle, Seldom an Office to Feds
Republicans push bills to allow more home-based businesses to qualify for tax deductions
Erin Maher Weinstein of Falls Church, Va., is a self-employed seller of promotional products - bumper stickers, T-shirts, or pens with a logo on them. She conducts business by calling on clients; she has no office other than her home.
Like other small-business owners, Ms. Weinstein operates under what she considers unfair rules. She can't deduct home-office expenses, according to a 1993 Supreme Court interpretation of the tax code. While General Motors or Microsoft can deduct 100 percent of the cost of employee health-insurance premiums from their taxes, Weinstein can deduct only 40 percent.
"Our health-insurance premiums are already much higher than they would be if I were working for a large corporation," she says. "I am being penalized twice for owning my own business."
Republicans in Congress are attempting to address these and other problems that affect the more than 9 million people in the United States who operate home-based businesses, in which more than 14 million people work.
Weinstein, and several business organizations, testified at hearings this week of the House of Representatives Small Business Committee. It is chaired by Rep. Jim Talent (R) of Missouri, and is considering a bill intended to level the playing field for those who work out of their home.
The major provisions in Representative Talent's bill and its Senate companion, sponsored by Sen. Christopher Bond (R) of Missouri, would:
* Redefine the home-office deduction to allow more small businesses to take advantage of it.
* Allow self-employed workers to deduct the full cost of their health-insurance premiums.
* Clarify just who qualifies as an "independent contractor," a status that causes small businesses serious problems with the Internal Revenue Service.
"Home-based businesses are a significant and often overlooked part of this country's economy," Senator Bond says. Women own most of these enterprises, Bond says, citing a Small Business Administration estimate that American women start some 300,000 home-based businesses yearly.
Currently home-based business can deduct home-office expenses only if the owner sees clients there and generates most income while in the home office. That means self-employed people, such as construction contractors, landscapers, and sales reps, who do most of their work away from the home office, cannot deduct their expenses. The Talent-Bond proposal would permit a home office "to include one where the individual performs his or her essential administrative and management activities such a billing and record-keeping."
The committee's ranking Democrat, Rep. John LaFalce of New York, cautions that care must be taken in expanding the definition: "It is ripe for abuse."
On health insurance, a law passed by Congress last year provides for a gradual increase from a 40-percent deduction to an 80-percent deduction by 2006. But the Talent-Bond bills would immediately move to 100 percent.
Frank Joseph, who owns a home-based publishing business in Chevy Chase, Md., welcomes the proposal. He says he currently pays more than $13,000 a year for health-insurance premiums for himself, his wife, his son, and one employee, and he just got a premium increase. "I just don't know what we're going to do about that," he says.
The independent-contractor question has vexed small businesses for years. The IRS currently enforces a 20-factor test to determine if an individual is a contractor or an employee. Small-business owners say the IRS has virtually "outlawed" independent-contractor status when dealing with small businesses.
"Between 1988 and 1994, the IRS's use of the 20-factor test resulted in some 11,000 audits, 483,000 worker reclassifications, and $751 million in back taxes and penalties," Bond says. Often the determination is made years after the original tax filing, with often disastrous results for the small business.
The Talent-Bond bill would "clarify" the definition of independent contractor. "If there is a written agreement between the parties and if an individual demonstrates economic independence with respect to the workplace, he will be treated as an independent contractor and not as an employee," Bond says.
Committee Democrats are cautious on the contractor issue. LaFalce agrees that "it needs legislative clarification." But he and others warn against creating a situation in which companies lay off workers only to rehire them as independent contractors in order to avoid paying benefits.
While the legislation has strong support, it's too early to predict if the entire bill, or just parts of it, will pass. The deductions would lower tax revenues (by about $8.4 million over five years, Bond says), so budget-cutters may balk at its provisions.