[Congressional Record Volume 143, Number 27 (Wednesday, March 5, 1997)]
[Senate]
[Pages S1993-S1995]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. HATCH (for himself, Mr. Baucus, Mr. Allard, Mr. Bond, Mr. 
        Lieberman, and Mr. Burns):
  S. 406. A bill to amend the Internal Revenue Code of 1986 to provide 
clarification for the deductibility of expenses incurred by a taxpayer 
in connection with the business use of the home; to the Committee on 
Finance.


                 the home office deduction act of 1997

  Mr. HATCH. Mr. President, today I am proud to introduce the Home 
Office Deduction Act of 1997. I am joined today by my friends and 
colleagues, Senators Baucus, Allard, Bond, Lieberman, and Burns. This 
bill will clarify the definition of what is a ``principal place of 
business'' for purposes of section 280A of the Internal Revenue Code, 
which allows a deduction for an office in the home.
  This bill is designed to reverse the 1993 Supreme Court decision in 
Commissioner versus Soliman. When this decision was handed down, it 
effectively closed the door to legitimate home office deductions for 
hundreds of thousands of taxpayers. Moreover, the decision unfairly 
penalizes many small businesses simply because they operate from a home 
rather than from a store front, office building, or industrial park.
  Mr. President, until the Soliman decision, small business owners and 
professionals who dedicate a space in their homes to use for business 
activities were generally allowed to deduct the expenses of the home 
office if they met the following conditions: First, the space in the 
home was used solely and exclusively on a regular basis as an office; 
and second, the deduction claimed was not greater than the income 
earned by the business. Through the Soliman case, the Supreme Court has 
narrowed significantly the availability of this deduction by requiring 
that the home office be the principal business location of the 
taxpayer. This requirement that the home office be the principal 
business location has proven to be impossible to meet for many 
taxpayers with legitimate home office expenses.
  For example, under the Soliman decision, a self-employed plumber who 
generates business income by performing services in the homes of his 
customers would be denied a deduction for a home office. This is 
because, under the rules, his home office is not considered his 
principal place of business because the business income is generated in 
the homes of the customers and not in his home office. This is the case 
even though the home office is where he receives telephone messages, 
keeps his business records, plans his advertising, stores his tools and 
supplies, and fills out Federal tax forms. In fact, having a full-time 
employee in the office who keeps the books and sets up appointments 
would still not result in a home office deduction for the plumber.

[[Page S1994]]

  This is preposterous, Mr. President, and we need to correct it. My 
bill would rectify this result by allowing the home office to qualify 
as the principal place of business if the essential administrative or 
management activities of the business are performed there.

  The truly ironic effect of the Supreme Court's decision is that a 
taxpayer who rents office space outside of the home is allowed a full 
deduction, but one who tries to economize by working at home is 
penalized. This makes no sense to me.
  The Home Office Deduction Act of 1997 is designed to restore the 
deduction for home office expenses to pre-Soliman law. Rather than 
requiring taxpayers to meet the new criteria set out by the Court, the 
bill allows a home office to meet the definition of a ``principal place 
of business'' if it is the location where the essential administrative 
or management activities are conducted on a regular and systematic 
basis by the taxpayer. To avoid possible abuses, the bill requires that 
the taxpayer have no other location for the performance of these 
essential administrative or management activities.
  Mr. President, today's job market is rapidly changing. New 
technologies have been developed and continually improved that allow 
instant communication around the once expansive globe. There is even 
talk of virtual offices, which are equipped only with a telephone and a 
hookup for a portable computer. These mobile communications have 
revolutionized the definition of the traditional office. No longer is 
there a need to establish a business downtown. Employees are 
telecommuting by facsmile, modem, and telephone. Today, both a husband 
and a wife could work without leaving their home and the attention of 
their children. In this new age, redefining the deduction for home 
office expenses is vital. Our tax policy should not discriminate 
against home businesses simply because a taxpayer makes the choice, 
often based on economic or family considerations, to operate out of the 
home.
  In most cases, start-up businesses are very short on cash. Yet, for 
many, ultimate success depends on the ability to hold out for just a 
few more months. In these situations, even a relatively small tax 
deduction for the expenses of the home office can make a critical 
difference. It is important to note that some of America's fastest 
growing and most dynamic companies originated in the spare bedroom or 
the garage of the founder. Our tax policies should support those who 
dare to take risks. Many of tomorrow's jobs will come from 
entrepreneurs who are struggling to survive in a home-based business.
  Mr. President, the home office deduction is targeted at these small 
business men and women, entrepreneurs, and independent contractors who 
have no other place besides the home to perform the essential 
administrative or management activities of the business. The Soliman 
decision drastically reduced the effectiveness and fairness of this 
deduction and must be reversed.
  This legislation can also have an important effect on rural areas, 
such as in my home State of Utah. Many small business owners and 
professionals in the rural areas of Utah must spend a great deal of 
time on the road, meeting clients, customers, or patients. It is likely 
that many of my rural constituents will be unable to meet the 
requirements for the home office deduction under the Soliman decision. 
Mr. President, we must help these taxpayers, not hurt them, in their 
efforts to contribute to the economy and support their families.

  The Home Office Deduction Act of 1997 not only has strong bipartisan 
support in the Congress, but also has the support of the following 
organizations: The Alliance of Independent Store Owners and 
Professionals, the American Animal Hospital Association, the American 
Small Business Association, the American Society of Media 
Photographers, the American Society of Travel Agents, Americans for 
Financial Security, the Bureau of Wholesale Sales Representatives, 
Communicating for Agriculture, the Home Office & Business Opportunities 
Association of California, the Illinois Women's Economic Development 
Summit, the Manufacturers Agents National Association, the National 
Association for the Cottage Industry, the National Association of the 
Self-Employed, the National Association of Women Business Owners, the 
National Electrical Manufacturers Representatives Association, the 
National Federation of Independent Businesses, National Small Business 
United, the National Society of Public Accountants, the Promotional 
Products Association International, the Small Business Legislative 
Council.
  I urge my colleagues in the Senate to join us as cosponsors of this 
important legislation.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 406

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Home Office Deduction Act of 
     1997''.

     SEC. 2. CLARIFICATION OF DEFINITION OF PRINCIPAL PLACE OF 
                   BUSINESS.

       Section 280A(f) of the Internal Revenue Code of 1986 is 
     amended--
       (1) by redesignating paragraphs (2), (3), and (4) as 
     paragraphs (3), (4), and (5), respectively; and
       (2) by inserting after paragraph (1) the following:
       ``(2) Principal place of business.--For purposes of 
     subsection (c), a home office shall in any case qualify as 
     the principal place of business if--
       ``(A) the office is the location where the taxpayer's 
     essential administrative or management activities are 
     conducted on a regular and systematic (and not incidental) 
     basis by the taxpayer, and
       ``(B) the office is necessary because the taxpayer has no 
     other location for the performance of the essential 
     administrative or management activities of the business.''

     SEC. 3. EFFECTIVE DATE.

       The amendments made by this Act shall apply to taxable 
     years beginning after the December 31, 1996.

 Mr. BAUCUS. Mr. President, it is with great pleasure that I 
join with my colleague from Utah, Senator Hatch, to introduce this 
important bill today. The Home Office Deduction Act of 1997 will 
correct a problem that has unfairly hurt thousands of small businesses 
in this country.
  In 1993, the Supreme Court, in its Commissioner versus Soliman 
decision, substantially narrowed the availability of the home office 
deduction. Until the Soliman decision, small business owners and 
professionals who dedicated a space in their homes for business 
activities were generally allowed to deduct the expenses of the home 
office if the space was used solely and exclusively and on a regular 
basis as an office, and the deduction was not greater than the income 
earned by the business.
  In the Soliman case, the Supreme Court limited the credit to only 
those persons who met with customers in the home office, or who 
conducted the primary business function in the home. This principal 
business location requirement has proven to be impossible to meet for 
many taxpayers with legitimate home office expenses.
  the ironic effect of the Supreme Court's decision is that a taxpayer 
who operates from a store front, an office building, or an office park 
is allowed a full deduction, but one who chooses to work at home is 
penalized. This ruling denies the home office deduction to self-
employed plumbers, home-care nurses, and other self-employed business 
people who try to economize by working from their homes but cannot meet 
with customers there due to the nature of their businesses.
  Our bill is designed to restore the home office deduction to 
thousands of American men and women who work at home. Rather than 
requiring taxpayer to meet the new criteria set out by the Court, the 
bill allows a home office to meet the definition of a principal place 
of business if it is the sole location where essential administrative 
or management activities are conducted on a regular and systematic 
basis by the taxpayer. To avoid possible abuses, the bill requires that 
the taxpayer have no other location for the performance of these 
activities.
  The job market in the United States is constantly changing. New 
technologies are helping to make the work-at-home option a practical 
reality, bringing all the benefits to society that home-based 
businesses can provide. Mothers and fathers, whether single or married, 
are more often choosing to work at home to be with their children. 
Having a parent at home who can help

[[Page S1995]]

supervise children while earning a living can have a tremendous 
positive effect on the well-being of our families and of society.
  Restoration of the home office deduction was one of the most 
important recommendations to come out of the June 1995 White House 
Conference on Small Business. Some of America's fastest growing and 
most dynamic companies originated in the spare bedroom or the garage of 
the founder. To foster continued economic growth and to encourage 
Americans to start their own business ventures, we need to pass 
legislation that will put home-based businesses on an equal footing 
with other enterprises.
  I urge my colleagues and the administration to support this 
legislation, and look forward to seeing it enacted in the 105th 
Congress.
                                 ______