June 5, 1997

Congress Should Change Tax Laws to Help Small Businesses, Says the National Association for the Self-Employed

Washington, D.C. -- Even though small and home-based businesses offer job opportunities, economic growth potential and social benefits such as alleviating traffic, the U.S. tax code discriminates against these businesses and punishes their operators in a variety of ways, according to the National Association for the Self-Employed (NASE).

In a Senate Finance Committee hearing today, NASE member Susan Thomas testified in support of the Home-Based Business Fairness Act (S. 460, introduced by Senate Small Business Committee Chairman Kit Bond), which addresses the home-office deduction, self-employed health insurance and independent contractor status, and S. 570, (introduced by Sen. Don Nickles) which would make the Electronic Federal Tax Payment System voluntary. Thomas, who owns a home-based marketing company in Annandale, Virginia, stated that even though she qualifies for the home-office deduction, she doesn't take it. "Taking the deduction, my accountant told me, is like waving a red flag at the IRS .... a flag saying, audit me!" And Thomas isn't alone -- of the approximately 14 million home-ba sed businesses, only 1.5 million of these business owners claim the deduction.

Currently, the IRS allows the home office deduction only if the office is used to meet clients and income is generated there. S. 460 modernizes the deduction by qualifying home offices which are (1) the location where taxpayers regularly perform essential administrative or managerial activities; and (2) is the only location available to perform such activities.

Thomas described several other ways that the tax code discriminates against small businesses, which the proposed legislation would rectify:

• The health insurance deduction for the self-employed -- While incorporated businesses may deduct the full cost of health insurance premiums for their employees, the self-employed may only deduct a percentage (40 percent in 1997, eventually rising to 80 percent in 2006). S. 460 would allow self-employed individuals to fully deduct the cost of health insurance premiums for themselves, their spouses and children, starting with tax year 1997.
• Independent contractor status -- Although tax accountants use the IRS' 20-factor test to determine whether a worker is an independent contractor, these factors are merely guidelines. S. 460 would set a new, streamlined definition of independent contractors to supersede the current, confusing 20-factor test used by the IRS.
• Electronic Federal Tax Payment System -- The EFTPS would require small businesses to pay their taxes electronically by July 1, 1997. Small businesses are worried about EFTPS; many want a paper receipt to prove they made a deposit, others are worried about glitches. Although the IRS will abate penalties for mistakes or late filing until Dec. 31, 1997, the NASE believes the best solution is to make the system voluntary, as proposed in Sen. Nickles' bill, S. 570.

"The current home office limitations are unfair and unwise," Thomas commented. "All over the country, larger businesses are laying off employees. If we want to help these people get on their feet, we should make starting a business a little easier for them.

"It's a mystery -- and very frustrating -- to those of us with home offices why the tax code impedes small, growing businesses, instead of encouraging them, or at least remaining neutral," Thomas concluded.

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