April 10, 2008

The American Homeowners Grassroots Alliance (AHGA) commends the House Small Business Committee for holding this hearing on Modernizing the Tax Code: Updating the Internal Revenue Code to Help Small Businesses Stimulate the Economy. AHGA is an independent consumer advocacy organization which focuses on policy issues that have a significant economic impact on the nation’s 75 million homeowners.

One of the biggest shifts in the small business marketplace is in workplace locations, which are rapidly moving into American homes. According to IDC, a national research firm, there are between 34.3 million and 36.6 million home office households in the United States alone. At least 18 million are home-based businesses, according to U.S. Census figures. They include Internet-centric businesses, such as the millions of eBay Power Sellers who derive all or most of their income from Internet commerce, service businesses such as website designers, real estate agents, mortgage brokers, and millions of other home-based businesses. The balance are employees of businesses of all sizes or governments at all levels who are telecommuting from home.

The number of teleworkers is increasing rapidly. A recent survey of members of the American Institute of Architects revealed that home offices are the most popular special function room of home buyers for the third year in a row. American homes are often the breeding ground for giant corporations. Both Apple Computer and Hewlett Packard were started in the garages of their founders.

AHGA appreciates this opportunity to offer tax reform suggestions to update the tax code to help small businesses stimulate the economy. Those tax code changes should also reinforce and encourage the formation of home-based businesses and telecommuting by employees. 

Home based businesses benefit society in many ways. Since they do not drive to work, home-based small business owners and teleworkers are helping to reduce rush hour traffic jams and defer the need for state and federal transportation infrastructure investments, both for expansion and maintenance. The shift to home-based teleworking is helping reduce environmental pollution and global warming. By using existing space in their homes, telecommuters and home based businesses reduce the need for the construction of new commercial office space, which helps the environment.

A recent study by TIAX LLC determined that a full time telecommuter who lives 22 miles from his or her workplace would save 320 gallons of gasoline and reduce CO2 emissions by 4.5 to 6 tons per year. At $3.00+ per gallon gasoline prices, they would also save teleworkers about $1,000 in cash annually, not including savings in automobile insurance, maintenance costs and depreciation resulting from those trips. Home based business owners avoiding commutes to a separate office at that distance would save the same amount. Since most home based business owners and telecommuters require high speed broadband, they also provide an expanded broadband revenue base that facilitates broadband expansion to rural areas and other underserved markets. For these reasons tax code changes that reinforce and encourage the formation of home-based businesses and telecommuting are particularly desirable.

Such changes will also have additional beneficial results. Because of the meltdown in the mortgage lending industry, some 2 million American homeowners, many of them owners of home-based businesses, will face foreclosure in the next several years. Changes in the tax code can make it possible for many of these challenged homeowners to improve their cash flow and efficiency and thereby avoid foreclosures. For all these reasons AHGA is pleased to suggest the following changes to the tax code.

Home office tax simplification: Home-based businesses incur expenses that would be easily deductible if the businesses were not located in a home. Many business owners don’t take legitimate tax deductions because of the complexity of the paperwork. Home offices should be made fully deductible if at least half of a room’s total area is used for business purposes at least half the time. Below either minimum the deductions would be proportional. (i.e. if 20% of a room is used as an office for 20% of the time the deduction is 20%). Operating costs should be allocated based on this formula. There should also be an optional standard deduction for home-based businesses were allowed.

Health insurance equity: Simplify the deductibility of health insurance so that all business owners who purchase their own health insurance receive an immediate 100 percent tax deduction.

Teleworking incentives: Thanks to federal legislation encouraging telecommuting by federal workers, 7% of the federal workforce now telecommutes. Incentives to expand teleworking in the private sector should also be created. To stimulate home office formation create a 20% tax credit applying to all products eligible for expensing treatment under section 179 provided they were used in a home office by a home based business owner, or a telecommuting employee in a program approved by the employer. Existing tax laws (expensing & depreciable life) would apply to the balance. These rules would also apply to all other business expenses attendant to establishing a home office, including energy efficiency improvements (i.e. adding more insulation, installing insulated windows, solar panels, etc.).

Depreciation reform fairness: Technology products (computers, peripherals, cell phones, PDAs, etc.) depreciable life should be reduced from 5 to 3 years because that is their actual useful life.

Telecom and computing equipment incentives: Cell phones, PDAs, computers used at least 50% of the time for businesses should be fully eligible for tax credit and depreciation treatment as above. Variable personal expenses (cost of a personal long distance call for example), aren’t deductible if they exceed a $500 annual de minimus exemption.

Home office financing: Allow a penalty free withdrawal or loan from IRA or 401k for all expenses attendant to home office creation.

Tax on talking - The federal excise tax (FET) on communications undermines an advanced, highly efficient, low cost local communications network necessary for American small businesses, and disproportionately burdens low-income, rural and lifeline telephone subscribers who have only local telephone service. It would be repealed by H.R. 1194 and S. 140/S. 170, which have bipartisan sponsors.

Service expansion tax credit - Tax credits or deductions to broadband and cellular providers targeted to expenses for build out of networks would speed the reach of broadband to rural or other underserved homes that currently lack broadband access would enable the creation of more home-based businesses and increased telecommuting.

Internet taxation – Because of the substantial economic and environmental benefits of home-based businesses, telecommuting and Internet commerce, small businesses should be exempted from state and local sales taxes on goods and services sold over the Internet. State and local governments also save substantial amounts, both directly and indirectly, from teleworking. Just as state and local governments provide exemptions from sales taxes for a variety of economic activities (sales tax holidays on back to school expenses is but one example), they should be prohibited from applying sales taxes to small business Internet sales.

Such an exemption would benefit consumers who shop online as well. A click of the mouse uses a lot less gas than a trip to the mall, and the mail carrier and FedEx/UPS trucks delivering the goods will be coming down your street anyway. Americans work more hours than any other society. Both online shopping and teleworking also save a lot of time, a precious commodity for all of us in our society where long working hours leaves too little time for personal relationships and other interests.

The public strongly supports exempting Internet sales from state and local sales taxes. In a recent issue of Parade Magazine readers were asked: “Should Internet Sales Be Taxed”?

Based on 3,125 survey responses, 85% opposed taxing Internet sales. Some of the comments of those opposed:

“An Internet tax would make online shopping less attractive, reduce sales and could force many online retailers out of jobs.”

“The Internet is one of the last ways that small businesses can compete with the big guys. Leave the Internet alone!”

“We’re taxed to death already. It’s a level playing field: Local businesses collect taxes, and online retailers charge shipping. It should be the consumer’s decision which one he wants to pay.”

Congress is being asked to consider a bill allowing at least 22 states to require most online sellers to collect sales taxes. Supported by a coalition of state and local governments, the Parade Magazine survey clearly demonstrates that those organizations’ Streamlined Sales Tax Initiative is completely counter to the sentiments of their own constituents. Those organizations are asking Congress to support legislation strongly opposed by their own constituents and the constituents of members of Congress. Congress should instead pass a bill exempting small and home based businesses from state and local sales taxes on goods and services sold over the Internet.

Telecommuter Tax Fairness Act (H.R. 1360; S. 785). States are also discouraging teleworking as a result of the state tax rule known as the "convenience of the employer" rule - a rule that unfairly punishes Americans who work for out-of-state small business and other employers and sometimes work from home. This rule is on the books in a number of states. Under New York's convenience of the employer rule, for example, nonresidents who sometimes telecommute to their New York employers may be forced to pay New York taxes on 100% of their income, even though they earn part of that income at home, in a different state. Because the telecommuter's state of residence can also tax the income earned at home, the telecommuter may be taxed twice on that income.

The Telecommuter Tax Fairness Act would repeal the "convenience of the employer" rule, which unfairly punishes Americans who work for out-of-state employers and sometimes work from home.

The Alliance appreciates the opportunity to provide these tax reform suggestions to update the tax code to help small businesses stimulate the economy. We thank the House Small Business Committee for this effort to help home-based and other small businesses.