One of the great things about a home-based business is that you can work anywhere you find convenient. You can set up your home office anywhere you like in your house — be it in the kitchen, a spare bedroom, the garage or in your basement. However, choosing the part of the house to become your work area hinges on two important considerations:
- Efficiency of Operations; and
- Tax Purposes
Home Office and 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:
- What kind of work do you do?
- Where in the home will the business be located?
- Will you be meeting clients?
- What adjustments to living arrangements will be required?
- What will be the cost of changes?
- How will your family react? Do you need to childproof your space?
- 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.
Home Office and 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:
1. 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.
2. 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.
- What Qualifies for a Home Office Tax Deduction?
- Tax Time: Check If You Qualify for Home Office Tax Deductions
- Understanding Depreciation: It May Be More Simple Than You Think
- Do You Qualify for Home Business Tax Deductions?
- 10 Common Home Office Mistakes