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One of the great things about working for yourself is
you can work anywhere you find convenient.
That means you could work at the kitchen table, the dining room table, or
even the backyard picnic table. However,
choosing the part of the house to become your work area hinges on two important
considerations:
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EFFICIENCY
OF OPERATIONS
In deciding you want to work at home, the first step
you need to do is to find a part of your house that you can use as your business
or work area. Some of the
disadvantages of working from home include space limitations, household
interference, isolation, and even security considerations. You need to carefully
consider the following questions:
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What kind of work do you do?
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Where in the home will the business be located?
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Will you be meeting clients?
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What adjustments to living arrangements will be required?
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What will be the cost of changes?
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How will your family react? Do you need to childproof your
space?
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What will the neighbors think?
Your office space represents the boundary where home
life stops and work life begins. As
such, determine how much space your work needs, then choose your place of work
at home carefully. The size of
space you need will depend, in part, on the type of business you run. You may
need a bigger space if you need to store inventory, set-up office equipment, or
machinery, and still have room for essentials.
Many businesses have been started from a corner of the
bedroom, alcoves, kitchen, or even closets. If there is available space, it
would be far better to take a spare area of the house and convert it into your
office.
The perfect space is a separate room, one that is
comfortable but away from distractions. There may be space in the basement,
garage, or a spare bedroom. The key idea is to learn to innovate and be
creative. Repaint the room, put some plants, and install good lighting to
transform any drab corner to a comfortable work setting. A separate space also
allows for maximum efficiency. It can also help keep your business materials and
equipment all in one place to help you keep the continuity of your work. Such a
room can help you create the appropriate atmosphere in which to conduct
business, and helps you approach your business as a business. You do not want
home activities to interfere with your business, or vice versa.
Having a workspace can help develop in you as sense of
professionalism. Your office is yours, and having this space to call your own is
tangible proof that you are an independent businessperson. Select a place that
makes you feel good, one that you will look forward to working in. Set-up your
office to reflect your personal and business style.
More importantly, your workspace should allow, inspire
or even force, you to work. The
right work area can help instill self-discipline and diligence in work, even
when no one is checking. As much as
possible, it must be an area away from family activity, and far from where the
kids usually play. Unless needed by
your business, keep the television turned off while you are working. Avoid the
kitchen area, as you will be too close to the "food or drink"
temptation. A quiet spare bedroom
can be ideal as can a finished basement or garage if they are not too hot or
cold. You may need an extension
phone put there and, indeed, after your business gets rolling it is best to get
a separate line for your business.
TAX
CONSIDERATIONS
Operating out of your home can also yield financial
advantages for you come April 15th. Because you do business at home,
you may be entitled to deduct a portion of the operating expenses and the
depreciation of your home.
If the business use of your home meets specific tests, you
may be able to deduct a percentage of your regular expenses, such as rent,
interest, taxes, insurance, repair and maintenance, etc.To qualify for deductions, the IRS stipulates that part of your home must
be set aside regularly and exclusively for the
business. In this regard, the place must be used as either
- Your principal place of business for any trade or business in
which you engage;
- As a place to meet and deal with clients or customers in the
normal course of your business; and
- In connection with your trade or business if you are using a
separate structure that is not attached to your home or residence (e.g. a
studio, garage, or barn).
If
you have employees who work out of their home, they may be entitled to deduct
expenses for the business use of their homes too. In this situation, though,
they must work at home for your convenience and not just because
it is appropriate and helpful in their jobs.
To figure what percentage of
your home operating expenses and depreciation is deductible, use either of
these two methods:
- Divide the area used for your business by the total area of your home.
For example, if your home measures 5,000 square feet and you are using
500 square feet for your home office, you will be able to deduct 10% of expenses
such as rent, mortgage interest, depreciation, taxes, insurance, utilities,
repairs, etc.
- Divide the rooms used for your business by the number of rooms in your
home. While easier, it is important
that all of the rooms in your home must be approximately the same size for this
method to become more accurate.
Once
you have determined the percentage of your home expenses that is deductible,
multiply this figure by each expense in order to obtain the dollar amounts of
your deductions. (For example, 20 percent times a $1,000 home utilities
expense equals a $200 business utilities expense.) Those expenses that benefit
only your business, such as painting or remodeling the specific area occupied by
the business, are 100 percent deductible. Expenses that benefit only your home
and are in no way related to the business, such as lawn care and landscaping,
may not be deducted.
To
make certain you have accurately defined those expenses that benefit 1) both
your home and your business, 2) only the business, and 3) only the home, it's
advisable to consult with an accountant. This is especially important if you own
rather than rent your home.
If
you decide to sell your home, the home expense deductions you've taken for the
business will have a bearing on how and when capital gains on the sale are to be
recognized.
Check
with your accountant to get information on full compliance with IRS regulations.
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