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Home Office vs. Leased Office Space -- Why Not Stay Home?

Filed under Office & HR.

The idea of working from home has a lot of appeal to many of us. Especially for those who've never tried it, it conjures up the image of leisurely coffee breaks in the backyard and mid-day errand runs. But looked at objectively, what are the real advantages of working out of your home?

In most cases, home is a great place to start a business. In fact, unless your business needs a retail outlet or a heavy manufacturing facility to operate, it's probably the best place.

Businesses run out of the home can be started from practically microscopic beginnings and can be allowed to grow slowly. You can start by moonlighting while you hold down a "regular" job, or by adding one client at a time. You can get your feet wet by trying out your concept, while keeping your startup expenses to a minimum. After all, even the largest corporations test-market their ideas for new products, services, or marketing and distribution strategies before they commit huge amounts of time and capital.

Perhaps the best thing about a home-based business is that it has low overhead. You're already paying the rent or mortgage on your residence, so there's little or no additional dollar cost. Besides the rent savings, you'll save money on commuting expenses, business clothes, dry-cleaning, and even cleaning services or supplies. The low overhead has important ramifications for the future success of your business.

Most new businesses take a while to break even. Don't forget that even after you make some sales, your customers may take 30 to 90 days to pay you. Furthermore, many established businesses experience cycles of flat or negative growth from time to time. By keeping your overhead as low as possible, you'll have an easier time waiting out the initial red-ink period or any temporary slumps that come your way. When you reduce your overhead costs, you reduce your risks.

As a rule, you should spend your money where customers will see it: on the quality of the product or service and on your advertising or marketing promotions. If the customer won't see it, spend as little as possible! For many service, mail-order or light manufacturing businesses, this rule ties in neatly with the idea of operating out of your home. If you can meet customers at their own sites, or deliver your goods or services by mail, phone, fax or computer, it doesn't much matter where you are located. If you can work out of the spare bedroom or garage, using furniture you've rescued from the attic or picked up second-hand, you can spend those precious dollars on inventory, tools or software needed to generate revenue.

The lower overhead has another implication for established businesses. Some service providers (for example, accountants or insurance agents) have found that they can reduce overhead significantly by moving back into the home, with the result that they can work fewer hours and take home the same pay. In some cases this may enable them to semi-retire or to spend more time with family.

Aside from these considerations, there are a number of tax advantages to working out of your home.

One is the tax break the IRS allows those who have their principal place of business at home, or who regularly meet customers or clients at home. If you meet the IRS qualifications, you'll be able to deduct a proportionate part of your "home" expenses (most notably depreciation, utilities, insurance, repairs, security system, and rent [if you don't own the home]), in addition to the mortgage interest and real estate taxes that you can deduct as a homeowner, and the direct business expenses (furniture, computers, office supplies, tools, equipment and some telephone charges) you could deduct even if you didn't qualify under home office rules.

An IRS requirement that's sometimes hard to meet is the rule that a home office can't be used for anything but a home office. For example, if you use your den as an office but also as an occasional guest bedroom, you've lost the deduction for at least part of the den. This rule seems unfair to those with smaller homes or apartments who may have to work on their kitchen table, but it remains on the books. An exception exists for home daycare providers, and for retailers or wholesalers who store inventory at home.

For new businesses, there's another tax-driven advantage to starting out of your home. Generally speaking, your startup expenses (the money you spend before the business opens) can't be deducted in the year they are paid or incurred, but have to be deducted over a number of years in a manner similar to depreciation. However, if you don't spend the money until after your business opens, some of these expenses will be immediately deductible. The lesson is, even if you plan to eventually move into leased office space, try to rack up some sales before you find, renovate and decorate your outside office. One of the best ways to do this is to start out of your home.

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