Feb. 6, 1997
Washington, D.C. -- Even though home-based businesses offer job opportunities, economic growth potential and social benefits such as alleviating traffic and reducing pollution and energy consumption, the U.S. tax code discourages these businesses and punishes their operators in a variety of ways, according to the National Association for the Self-Employed (NASE).
In testimony today to the Senate Committee on Small Business, NASE member Carole Wiedorfer, who started a home-based accounting and tax business in 1995, described the number of ways tax provisions have cost her -- and business people like her -- time, effort and money:
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). The value of the deduction is further reduced by restrictive calculating procedures -- involving the business' net profitability and excluding the deduction from the self-employment tax.
The SEP/IRA retirement plan contribution deduction -- This deduction's value is reduced by the same procedures affecting the health insurance deduction. Incorporated businesses have no such restrictions on this provision.
The home office deduction -- This expense may only be deducted if the office is the principal place of business or is used for meeting with clients. The deduction is limited to the net income from the activity performed in the home office. Furthermore, the IRS views Form 8829 (the home office deduction form) as a red flag for an audit.
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. Both the IRS and the courts have decided seemingly identical situations in opposite ways. While the IRS offers some "safe harbor" defenses, these are arbitrarily decided as well. "The current home office limitations are unfair and unwise," Wiedorfer said. "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. The same goes for people who will be forced off the welfare rolls under the new law. They should be given the opportunity to start businesses with a minimum of upfront costs. Home-based businesses are an obvious way to help facilitate that.
"It's a mystery -- and very frustrating -- to those of us with home offices why the tax code is trying to stop all these things from happening, instead of encouraging them or at least remaining neutral," Wiedorfer concluded.
Founded in 1981, the National Association for the Self-Employed represents more than 320,000 small-business people nationwide. The largest small-business association of its kind, serving the needs of the smallest of small business, NASE's primary goal is to help small businesses become more competitive by providing benefits and services that will meet its members' business, financial and personal needs.
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