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(Los Angeles Daily Journal, 5-6-04)

By Matt Daniels, J.D., Ph.D.

I don’t know if the Internal Revenue Service has ever conducted a poll to see what part of the U.S. tax code Americans think is the most needlessly complex, but my vote would probably go to the category the IRS calls, “Expenses for Business Use of Your Home.”

The home office deduction is intended to serve a very important business purpose: the fair tax treatment of people who work out of their own home.  But this deduction’s economic value actually pales in significance to its social value. 

You see, many of the people who are eligible to claim the home office deduction are people who have opted to work at home for various family-oriented reasons.  They are mothers and fathers who want to be home when their children get off the school bus.  Or husbands and wives who would prefer to spend their after-work hours engaging in “pillow talk” rather than trying to beat the rush hour traffic home.   Or adult children who anchor a multi-generational home and want to be accessible to their elderly parents in the event of an emergency.

I emphasize “who are eligible,” of course, because many home-based workers do not even attempt to claim the home office deduction.  And who can blame them?  The home office deduction tax form (IRS #8829) is 42 lines long and the average taxpayer would probably need close to 8829 minutes to do all of the elaborate record-keeping and calculations necessary to complete it.

Like most needlessly-complex features of the tax code, the home office deduction asks taxpayers to answer a number of questions that, at first blush, seem reasonable.

For example, the IRS first asks taxpayers to determine the percentage of their home that is used exclusively for business purposes (with special rules for those who operate a home day care).  Then, the IRS asks taxpayers to calculate what portion of their housing costs (mortgage, taxes, insurance, utilities, repairs and maintenance, etc.) go to pay for their home office.  Next, the IRS asks taxpayers to figure out the business “depreciation” of their home office assets.  And, finally, the IRS asks those whose eyes haven’t completely glazed over to report their “unallowed operating expenses” and “excess casualty losses.”

In the end, the cumulative burden of having to keep track of and then calculate the various percentages for 42 lines worth of home office tax data is a lot of trouble.  Which is why many home office workers do not bother to claim the deduction.  And why people like me who know this deduction has considerable social value say, “There’s got to be a better way.”

So, what’s the solution?  What if the IRS made it possible for those who qualify for the home office deduction to claim a flat percentage of their earnings (up to a certain dollar amount) to offset the basic costs of running a home office?  This would eliminate the need for home-based workers to do all sorts of record-keeping solely for the benefit of the Tax Man.

Home office tax simplification would be especially useful to people who have elected to work at home for family reasons (and have better things to do than to fill out lengthy tax forms).  And it would make it considerably easier for businesses and individuals that are weighing the economic implications of establishing a home office to see the merits of a home-based arrangement.  (A recent Wirthlin Worldwide poll found that 87 percent of all Americans believe that “businesses should do more to help strengthen their employees’ marriages by offering flex-time, job sharing, and home-based work options.”)

Would federal policymakers need to have some safeguards to prevent taxpayer abuse of a simplified deduction?  Sure it would.  But capping the total amount one could claim for the home office deduction would go a long way towards preventing egregious abuse.  (And if policymakers needed further safeguards, they could do as they have done in several other areas and have a “short” form for general use and a “long form” for situations that merit special consideration.)  

Whatever the case, federal policymakers should see simplifying the home office deduction as part of a larger strategy for making it easier for people to do more income-producing work at home.  Home-based work not only offers significant environmental benefits (less traffic congestion and gas consumption), but it also promises all sorts of important social benefits that come from stronger marriages and families.
And that, more than anything else, is why the current home office deduction gets my vote for the most needlessly complex part of the U.S. tax code.

Matt Daniels is an attorney and political scientist who serves as the president of the Alliance for Marriage, a non-partisan  organization working to ensure that more children are raised in a home with a mother and a father.