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Many small business owners start out or indefinitely operate out of their primary residence. The SBA estimates over 50% of new small businesses start out of the home. For many virtual businesses, the home office is a permanent and cost-effective option. Often the business begins as a part-time venture – or started by stay-at-home parents. For many start-ups, the home office is the only way to begin – until cash flow allows the payment of rent or the purchase of a commercial space.
In fact, although many non-entrepreneurs scoff at operating a business out of a bedroom or corner of a living room – Many major corporations started in the same manner. Apple Computer. Hershey’s. Mary Kay Cosmetics. The Ford Motor Company. Laugh all you want those with no entrepreneurial spirit!
No matter the jibes, as a home-based business owner, you need to consider several factors.
First, is your residence zoned for the business you are operating? Check with your town (most have zoning maps) and ensure you can operate out of your home – or you risk fines and shutdown. For professional offices or administrative spaces (or virtual stores) zoning is typically not an issue (unless you are leasing your residence – check your lease). For businesses that will engage in shipping or operation and storage of heavy machinery – even if you are a woodworker in your garage – check the zoning. No sense in starting and becoming successful to be shut down because you cannot have your delivery trucks leaving or entering your street.
Second, while we are on the subject of legal requirements, can you legally operate your business in a home? What regulations apply to your business? For example, you may need a dedicated bathroom, specialized equipment (ovens, sinks), permits…You probably cannot prepare food or sell liquor. This is the time to check with your town – or contact an experienced business attorney to help you. You can also contact your local SBDC or SCORE chapter for help. Do not skimp on planning – and do not be embarrassed or afraid to ask for help. Clients who seek expert advice avoid problems in the future.
Third, can you fit in your residence? Often, inventory fills the garage…then the bedroom. Meeting with clients is difficult with the kids doing homework at the same table. Leaving sensitive client documents or important files where kids or pets can interfere is non-optimal. Be sure to graph out what space you can designate as “business” – and ensure it is enough from now until you estimate you will rent or buy a dedicated commercial space. I would never dissuade an entrepreneur from just “getting started!” However, if the space is inadequate, do you have options to rent storage or share office meeting space?
Many towns and cities have “incubators.” These are flexible office spaces that typically offer receptionist services and mentoring to new entrepreneurs. You can also find office share opportunities through the Small Business Development Center. To start, make sure you have enough space at home to operate for a least a year (or until your projections show cash flow will allow a rent payment).
Fourth, can you accommodate “foot traffic?” This issue drove me to move my law office out of my home many (many) years ago. The day I decided to find an office to rent, I had simultaneously: an appraiser examining the contents of an estate in my kitchen, a real estate closing at my dining room table, the FedEx guy in my den scanning packages, another delivery at the front door, clients in the office waiting for me to review their business plan, the phone ringing, three dogs barking, my kids coming home from school (with several friends for a “snack”)….it was too much. The other issue was having my professional life interfere with my personal life. Having clients over was uncomfortable – especially when they arrived unannounced during evening or weekend hours. Realistically examine this issue before it becomes one.
Can you have a dedicated phone? Do you have a dedicated office “area?” These are important not only to appear as professional as possible, but also to properly expense the use of your home for tax purposes.
The IRS (and state) permit the expensing of use of your personal residence for business – but you must comply with strict guidelines to do so. You must exclusively and regularly use your home as your principal place of business – including as the place you meet clients and customers. The area you use must be exclusive to your business – so you cannot use your spouse’s desk when he or she is not home and call it “exclusive.” (The test is different for a daycare, by the way.)
You also cannot take a deduction if your “business” is actually a hobby. I have a separate white paper on that issue – Simply, if you are not operating for profit and occasionally sell scarves you knit or occasionally help someone with tax returns – and do not profit – you are not a “business” and are doing these things for fun. The IRS does not recognize fun. (I know you are surprised they are the fun police.)
IRS Publication 587 (released in 2013) details exactly how to apportion your home expenses for your business use. For example, if your house is 2000 square feet and 20 square feet of your home is dedicated to your desk and file cabinet, 1/100 of your home’s taxes, electricity, gas, water, mortgage…can be expensed as “business.”
You can use the simplified method – merely multiplying the square footage by the allowance and deducting that.
You also must consider the time you used the home – part of the year? The entire year? Seasonally?
The calculations can be quite difficult – especially when considering depreciation or sale of the residence – and a CPA or tax attorney is invaluable to prepare or at least review your deductions. Importantly, an experienced CPA or tax attorney will recognize deductions you may miss – and will offer other advice to help you become successful quickly!
So: You can have your business in your home. You can take business deductions if you have a home-based business. And you can start your business today without renting or buying a space.
And you must – must – hire a competent accountant. Unless you are an accountant…then make sure you pay yourself for your time!