Simplify the Home Office Deduction

Small business owners should be able to claim every possible tax deduction without going through superhuman efforts to comply with a convoluted tax code or worrying that claimed deduction will automatically flag them as audit-bait for the IRS. But one deduction that consistently goes unclaimed is the home office deduction. Why? The tax code behind the deduction is like trying to walk a tightrope over a pool full of sharks, only the sharks are IRS auditors.

In theory, homeowners can claim a portion of their real estate taxes, their qualified mortgage interest (though not the principal), and a depreciation deduction which should help recover some of the home’s original purchase price. But that’s where the rules start to get complicated.

According to the IRS, the real estate taxes you can use in your deduction are the taxes actually paid to the taxing authority, which is often different from the amount of taxes your mortgage holder requires you to pay into an escrow account with them. Further, special assessments for features of local benefit, such as sidewalks or water and sewer systems, do not count as part of your real estate tax. You can deduct a portion of those taxes, but they are subject to the rules of depreciation instead.  When it comes to deductible mortgage interest, different dollar limits apply to different types of mortgages, which can turn into a headache right quick when trying to determine which interest “qualifies” for deductions the IRS.

What a labyrinthine mess.  And because of the complex tax code, the U.S. Small Business Administration found that while 53% of America’s small businesses are home-based, relatively few of them bother to take advantage of their rightful home office deduction. It’s just too complicated. And if you get it wrong, say hello to a potential audit. No wonder business owners are saying “no thanks” to the home office deduction.

But the “Home Office Tax Deduction Simplification and Improvement Act of 2009” seeks to change all that by streamlining the reporting requirements for the home office deduction, easing the burden of proof on small business owners.

This bipartisan, bicameral bill was introduced by Senators Olympia J. Snowe, R-Maine, and Kent Conrad, D-N.D., along with Rep. Charles A. Gonzalez, D-Texas.

“With a morass of paperwork attributable to the home office deduction, the time-consuming process of navigating the tangled web of rules and regulations makes it unsurprising that so many small-business owners forego the home office deduction,” said Senator Snowe. “By simplifying this vital tax incentive, our bill will give small firms much-needed relief from burdensome tax rules, which, in turn, will allow them to focus their efforts on developing new, cutting-edge 21st century products and services and creating new jobs.”

Now there’s an idea we can all get behind.  Go here to add your voice to the petition to pass this bill and simplify the home office deduction.