June 25, 1997
Washington, D.C. -- As Congress considers tax reduction legislation, it should change provisions of the U.S. tax code which discriminate against the smallest of small businesses and punish their operators in a variety of ways, according to the National Association for the Self-Employed (NASE).
In "mock" hearing today sponsored by the U.S. House of Representatives Republican Conference, NASE member Susan Thomas testified in support of the budget reconciliation legislation passed by the House Ways & Means Committee that would expand the home office deduction and clarify rules defining independent contractors. Neither provision was included in budget legislation passed last week in the Senate Finance Committee.
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-based 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. The House legislation 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 also described how the murky status of independent contractors hurts small businesses. Although tax accountants use the IRS' 20-factor test to determine whether a worker is an independent contractor, these factors are merely guidelines. Actual case law has shown that apparently identical situations have been decided in opposite ways by both the IRS and the courts.
"If I ask an independent contractor to do something specific for me, the IRS can come back and say that since I told the contractor what to do, the contractor was really an employee," Thomas continued. "And I would then be responsible for thousands of dollars in back taxes, penalties and interest. That's what makes the IRS' archaic and confusing 20-factor test so threatening. Almost any business relationship can be made to look like an employer-employee relationship."
"The current tax code provisions are unfair and unwise," Thomas commented. "We should make starting a business easier, not harder, for independent entrepreneurs.
"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. "I, and the NASE, encourage the Senate to adopt the House-passed provisions on the home office deduction and independent contractor clarification."
###
Go to News page.