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.