You Should Get a Tax Break For Working From Home: So, Why Is It So Complicated?

The rise of telecommuting seems about as inevitable as the decline of the horse and buggy, but our tax laws have proved ill-equipped to manage the change

800 workingfromhome1.jpg

When Yahoo CEO Marissa Mayer ordered her company's telecommuting employees back to the office this February, the choice provoked a month-long debate about the changing relationship between technology, family, and the workplace. For many, Mayer's move was a desperate and retrograde shift. Even those who found good reason for the policy, like the New Yorker's James Surowiecki, expressed hope that it wouldn't put a dent in the general telecommuting trend.

But if we're worried about the future of telecommuting, there might be a bigger source for concern than entrenched corporate culture -- namely, the Internal Revenue Code. The rise of telecommuting seems about as inevitable as the decline of the horse and buggy, but our tax laws have proved themselves ill-equipped to manage the change.

Here's why. One of the fundamental features of federal income taxation is that taxpayers can deduct "all the ordinary and necessary expenses paid or incurred ... in carrying on a trade or business." Historically, applying this principle has burdened the courts and the IRS with a series of abstruse line-drawing exercises that parse the space between expenses that are "business" and "personal. For example, you can ordinarily deduct office rent, but not the train pass used exclusively to get you there.

The art of line-drawing get especially tricky when all-things business and personal happen in the same place: the home. Here, the IRS will still give you your "ordinary and necessary" deductions, but they won't make it easy. (The curious and the masochistic can dip into this 30-page IRS pamphlet for more.) This is the so-called "home-office deduction" -- which, over its soporific-yet-stormy history, has been variously mocked as a source of taxpayer abuse, tax-code unfairness, and judicial confusion -- not to mention a great way to earn yourself an audit. And yet the basic idea seems right: If our fundamental tax base is going to be income (in the Haig-Simons sense), we need mechanisms for distinguishing between what is and isn't consumption.

These home-office deductions wouldn't be chump change. The average, depending on how you count, is about $3,000 a year. But the strange part is that, even though the number of people who work full-time from home is exploding, the number of people who take advantage of the tax break has stagnated. Between 2005 and 2010, for instance, the number of full-time home workers increased by 20%, from about 4.8 to 5.8 million people. But the number of deductions increased by less than 7%, from about 3.2 to 3.4 million. (As a proportion of total taxpayers, these figures look even more anemic.) Between 2009 and 2010, the number actually declined slightly.

Why is this happening? Not all full-time home workers are entitled to the deduction. (To get it, among other things, you need to be working at home for "the convenience of [your] employer.") But a sizeable chunk of new telecommuters almost certainly are -- especially because most telecommuters are self-employed. Instead, I suspect the answer is the sheer complexity of the thing. One possibility is that, as telecommuting moves from niche to norm, the profile of the average telecommuter might more closely resemble that of the average taxpayer -- and thus less likely to take advantage of sophisticated deductions.

These deductions are complex partly because they seem especially prone to abuse. Sure, we want to give deductions for turning that garage into an auto-body shop, but not to the professor who skims a few law-review articles at the dining room table. When the risk for abuse is high, we might feel comfortable reducing the number of type-I errors (those who shouldn't take deductions but do) at the cost of increasing type-II errors (those who should take deductions but don't). The point here is that technological progress is leading to a lot more type-II errors in this area -- and we should be uncomfortable about that shift.

That might change. This year, the IRS introduced an "optional safe harbor method" for taking the deduction, complete with a hat-in-hand acknowledgement that taking the deduction was proving especially "complex and burdensome." (In rough terms, the new method lets you multiply the square-footage of your office by a standard rate, up to a max of $1500.)

In a couple of years, we'll know if this kind of simplification makes it easier for deserving taxpayers to take the deduction. In the meantime, this is always a good day for blaming the tax code on behalf of those who don't.