Last year, Congress passed the Small Business Jobs Act, which included a provision that allowed self-employed taxpayers to deduct health insurance costs from their self-employment tax. Unfortunately, the deduction only applied to 2010 taxes. Unless Congress moves to extend the deduction, it will not be there for 2011 taxes.
Business owners are saying that the prospects for two important tax fixes for small businesses are waning. The first would make the health insurance deduction permanent. The second would simplify the home office deduction. The requirements for deducting the expenses of a home office are currently so complex that more than half of the people who qualify for the home office deduction choose not to take it.
Because Congress is so divided right now, there is little expectation that the politicians will move quickly to resolve the two issues. Nonetheless, advocates for the measures are not giving up on them. There are currently 22 million Americans who are self-employed business owners, and more than half of them work from home.
The problem from the political point of view is that there is so much sensitivity to raising the deficit right now. Any extension or expansion of tax deductions to business owners would have to be made up for with other revenues or spending cuts. Orange County tax attorneys note that in the current political environment, new revenues and new cuts are going to be hard to come by.
There would be nearly $2 billion in tax savings to business owners if they could continue to deduct the cost of health insurance. But, at the same time, Congress would have to find that $2 billion somewhere else.
Business owners see the issue as one of fairness. Self-employed businesspeople are simply seeking the same opportunity to deduct the costs of employees' health insurance that other employers have.
Source: Bloomberg Businessweek "Tax Break for Self-Employed Likely to Vanish" 5/18/2011