Home-business owners want tax reform and clearer rules

Insight on the News, May 12, 1997 by Gene Koprowski

Two years ago, President Clinton invited hundreds of entrepreneurs to Washington for the White House Conference on Small Business. Partners, sole proprietors and shop owners from all over the country came to listen to Clinton declare his concern for their future. But the president offered few solutions to the problems these businesspeople confront daily. Now more than ever, they want the White House and Congress to clarify rules on independent contractors, make health insurance fully deductible and rewrite the tax code for home-office deductions

Washington's inaction is about to end. Sen. Kit Bond, Republican from Missouri, has gathered 17 cosponsors for his Home-Based Business Fairness Act of 1997, and Rep. Jim Talent, another Republican from the Show-me State, is introducing a companion bill in the House. Though House Speaker Newt Gingrich has backed off on huge tax cuts, the GOP faithful want to) deliver on their promises to one of their core constituencies.

"Clearly, home-based businesses represent one of the fastest-growing sectors of the economy," Bond says. "Thanks to the technology offered through modems, fax machines and cellular phones, in excess of 9 million Americans now operate home-based businesses, bringing to 14 million the number of people who earn income from a home-based business."

Mary Beth Reilly, Senate lobbyist for the National Federation of Independent Businesses, says that home-based entrepreneurs are running up against outmoded rules and regulations from a government that hasn't kept pace with the contemporary business climate. While large corporations such as IBM, Coca-Cola and Intel can deduct 100 percent of their share of employees' health-care costs, "the self-employed farmer, child-care provide or consultant can only deduct 40 percent of the cost of the insurance," Reilly says.

For example, Susan Pepperdine, a self-employed businesswoman in the Kansas City area, says it costs $425 per month to insure herself for health care. But 4 million other Americans -- about 25 percent of the nation's self-employed entrepreneurs -- don't carry health-care insurance for themselves or their families, and many blame the tax code.

"Unlike large- or medium-size businesses, those that have resources to offset the burden of taxes and regulations, small businesses face an uphill fight from the start," says Janet Bonet, president of the Omaha chapter of the Nebraska Home-based Business Association. According to Bonet, current laws especially are tough on women who use part of their homes for child care, which invalidates their deductions for home-based businesses.

Outmoded regulations also bedevil entrepreneurs who hire workers. Growing businesses like to hire contractors to work on projects or on an as-needed basis. Such workers are treated differently than full- and part-time employees. "But the IRS has a subjective, common-law test which it administers to determine if your company is in compliance with the laws," says Reilly. "As a result of the confusion, many small-business owners are reluctant to hire an independent contractor when doing so may be the best business decision."

In fact, the IRS has earned $751 million in back taxes and penalties levied against 11,000 unwitting entrepreneurs audited since 1988. The Republican Congress last year passed a bill making it more difficult for the IRS to reclassify contractors as employees, but Bond and Talent are hoping to build a "safe harbor" which precisely defines independent contractors.

Advocates of legislative reform want action on the home-office deduction as well. Four years ago, the Supreme Court ruled that home-office deductions could not be taken for work space if much of the work was done away from home. In Commissioner of the Internal Revenue Service vs. Soliman, the court ruled that Nader Soliman, an anesthesiologist, could not deduct his home-office expenses for administrative tasks because he performed much of his work at the hospital. Many other consultants or service practitioners from plumbers to painters perform day-to-day administrative work at home.

"The Home-based Business Fairness Act is a commonsense measure that has long been needed to provide tax fairness for the ever-growing number of individuals who operate their businesses from their home," concludes Bond. Will the law pass? That's the major question concerning Reilly and other small-business advocates. "We think there is a good chance for its passage this year or next," she says.