If it's crazy, someone in Congress will propose it....home office deductions

There is a provision in the Code which generously permits taxpayers who have an office at home used exclusively as their principal place of business to deduct an allocated portion of the costs of their home for that office.  Almost 3.2 million returns claimed the deduction for 2005.

I suspect that the provision is abused a good bit by claims made for amounts much beyond the amount that should be allocated to the office.  Anecdotal evidence abounds of home office deductions being essentially "made up out of whole cloth" by tax preparers or of taxpayers claiming almost all of their home is "used exclusively" for their business, when in effect they merely have a small storage area and desk for the business use.  Others claim a home office deduction when they actually work at their employer's place of business.  All of those amount to cheating.

Yet Nina Olson, the "national taxpayer advocate, has said that "it is questionable whether most taxpayers who are eligible to take the deduction actually do so" and recommended a standard deduction.

On March 16, John McHugh (R NY) and 28 co-sponsors introduced HR 1509 to create an election to permit taxpayers who are permitted a deduction under section 280A to take instead a new standard deduction for home offices (lesser of $1500 or 100% of the taxpayer's gross business income "derived from such [home office] use").  Elections generally aren't good ideas in tax codes.  This one certainly wouldn't be.  It just creates a new $1500 deduction that every business that can't substantiate an even greater home office deduction, even if the actual cost is more like $50.  In other words, this election merely gives a taxpayer with a lower cost an option to deduct a larger cost; it's an outright tax cut.  We have too many provisions already that let businesses deduct fictional costs, in the name of "simplification" or "stimulus". 

And on June 25, one representative--Gonzalez (D TX) and two senators--Snowe (R Maine) and Conrad (D ND)-- introduced yet another bill (S. 1349 and H.R. 3056) that is put out under the gloss of being a "simplification" measure.  It  adds a new "de minimis rule for personal activites conducted in the home office business space.  That's equally nutty, to put it mildly.  Taxpayers already read the rule leniently.  If you add a subjective measure for de minimis use, many more taxpayers will abuse the rule.  

Comments

[r. willis]

seems to me that if you are working from home you should be able to take some kind of deduction even if the kids or the cat occasionally use the same space. probably abused, yes, but also difficult to quantify. so if you give people a flat elective amount, maybe they will be less likely to claim more, and those that do can be more readily selected for examination.

[LindaMBeale]

I don't see the need for an election. Taxpayers will likely compute their deduction both ways and take the most generous so that it will benefit those who weren't otherwise entitled to as much of a deduction as the "standard" deduction provides. Simplification simply is not a strong enough justification. If someone really has a home office for their business, it should be relatively easy to substantiate the office deduction (pictures twice annually of the space, etc.). I don't agree on the basic premise that use by kids or cat shouldn't be a problem--either it is a home or a home office. If the space is used by the kids and cat (i.e., it functions as a family room/den), then it is not an added expense endured for the sake of the business and shouldn't be deductible.

[DFMahey]

What it comes down to is that many Americans don't take the home office tax deductions because of the law's complexity and the the record keeping requirements. In reality the real reason is a lot of people have this notion, that was probably more accurate 15 to 20 years ago, that they will be audited. While I realize that those points may mean nothing to you the fact is that the HOD is a legal statutory deduction and if those eligible are not taking the deduction than something is wrong.

If you read the reasoning behind the proposal one of the pieces of research associated with the proposed bill is that according to according to research from the U.S. Small Business Administration indicates that roughly 53 percent of America’s small businesses are home-based, but few home businesses actually take advantage of the tax incentive because of the complex reporting requirements.

[LindaMBeale]

I had understood that some research suggests that the deduction isn't used as much as it "could" be. But I am not sure I find it convincing.

Anecdotally, I hear about tax preparers "inventing" a home office deduction and/or "guesstimating" reasonable depreciation and utility deductions for home offices when it is clear that a business that may be conducted using the home would not qualify for a deduction because it doesn't have a space that is set aside for which the expenses are clearly business rather than personal. Many caterers and others in the food prep industry, for example, may simply be using an existing home space with very little marginal cost for the business itself. A "standard deduction" would be permitting the business to deduct personal costs, as would a "de minimis" personal use standard, which would result in all of those businesses likely claiming business deductions. Just because a deduction exists does not mean it should be set up in such a simple way that every business that might be eligible actually takes it. Given the kinds of abuses of taxes that we have seen over and over again, it is reasonable for the benefit of easily abused provisions to be harder to obtain.

[r. willis]

but if you allow a flat 1500, you take a lot of potential audit issues off the table and allow IRS to focus its attention on abusers

[Charles]

Home office deduction is ridiculous. The scam is for commuting, since all mileage becomes business mileage. that's the only time I see the fraudsters benefit. Linda, I would like to know, does the IRS ensure these 8829 people recapture their depreciation when they sell?

[LindaMBeale]

i haven't noticed (or specifically looked to see) if there are any studies on how well depreciation recapture is working in this area. I suspect you are correct that many (if not most) who claim a home office deduction don't take the recapture into account on a sale. If I were hazarding a guess--with an understaffed and underresourced IRS, it probably is another time-consuming compliance check that is left undone more often than not.