House Ways and Means Committee
Testimony of Henry Davis

My name is Henry Davis, President of Henry Davis Consulting - a home based business. I am here today representing the National Home Office Association. My company is a good example of how the new breed ofInformation Workers provide services, and some of what they are capable of doing. I specialize in providing New Product Consulting to companies that use or produce technology based goods and services. Our services include product planning, introduction, marketing,definition, and assessment. Prior to starting Henry Davis Consulting,I spent twenty years employed in the semiconductor and software indistries. I have authored over one hundred thirty articles and papers on computer and semiconductor technology and its application. My contributions to industry have been recognized by Electronics Magazine, the American Electronics Association, and others.

For the last three and a half years I have consulted with big companies like IBM and Texas Instruments, while providing guidance to small emerging companies like BEARAK REPORTS, a financial services company. Modern computer technology coupled with networks like the Internet provide the infrastructure I need to maintain an electronic presence for my customers no matter where I am physically located. My home office provides the physical location for computers, phones and facsimilie communications. The telephone network and Internet allow me to appear as if I am in my office, even if I am half way around the world. Modern technology permits us to work wherever we are: a plane,in a hotel room, or even here at these hearings. Communication with my office and customers is a phone call away. Even a cellular phone will work.

The very idea of an office is changing thoughout business. Timesharing offices in a scheme called hotelling is becoming more popular among companies whose employees spend most of their time at client sites. For the home based business, the home office becomes a sort of communications central. These rapid and profound changes in how we dobusiness demands changes in how our businesses are managed, and how we account for our expenses.

The current tax regulations governing deducibility of home offices is hopelessly outmoded. New technology and ways of doing business mean that for a growing segment of both home based and corporate workers,the office is becoming an electronic presence visited only to perform necessary administrative functions. This improves finiancial productivity, reduces the commuting burden on our roads and highways,and increases the amount of time we have to spend with our families.

Home based businesses are the fastest growing segment of business inthe United States. In the last economic recovery, home based businesses created millions of important new jobs. Projections are forthese small businesses to continue their phenomenal growth and createat least 12 million new jobs between 1992 and the year 2005. There are an estimated 24 million people who operate businesses from their homes today.

It's time for legislative change to remove the penalties home based businesses face simply because they happen to be located in a residence.

Let me personalize the impact of home office deductions. Twenty five percent of my home is dedicated to maintaining an office and professional library. My office serves the usual functions including a place to write and maintain business records. The office is used only for business and is unusable by my family in my absence. Most importantly, my office provides an electronic presence including voicemail and 24 hour per day computer access while I am away.

In 1993 I traveled over 500,000 airmiles to work with clients at their locations. I was away from my home office more than 90% of the time. In 1994 my work kept me out of the office 80% of the time. If I had my office in a commercial office building, my office costs could have been deducted as a cost of doing business. But because my income was based on work performed outside my home office, I am effectively precluded from claiming the deduction.

In my case, my home office would have been worth a tax savings of $1050 in 1994. To put the value of a home office deduction in perspective, my tax savings could have:

  • paid 112 hours of business telephone bills to find 5 more clients
  • paid for 8 months of classified advertising to find 8 more clients
  • paid for a direct mail program to gain 5 more clients
  • paid all expenditures for attendance at a trade show
This would have resulted in additional taxable income of $25,000. At the marginal rate of 28% that $1050 home office deduction could have produced a net tax revenue increase from my business of at least $5950.

The way in which we do business is changing rapidly. When I travel around the world, I can use my home office based computers by using a notebook computer and modem. While I may be sitting in a hotel, on an airplane, or in a client's office, work is being done electronically in my home office. Faxes, messages, and information are all routed to me in my home office and can be available to me anywhere in the world at the push of a button. I don't need to be IN my office, but I do need the office. I work in my office electronically.

Home based businesses are mostly cashflow based businesses. We don't have a ready equities market, there is little in the way of business loans, and lines of credit are generally not available to us. We run our businesses based on short term positive cashflow and controlling costs. Having our offices in our homes is one way of controlling overhead.

Big business turns to home based businesses for outsourcing. We reduce costs and can often do a better job. These same big businesses are able to deduct costs of office space that isn't even occupied; it's empty and shutdown. At the same time, home based businesses have barriers in the way of deducting dedicated home offices just because we don't spend all of our time in the office. It isn't right. It isn't reasonable. And it's bad for business and the country.

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