More and more, these days, people work from home, either full-time or part-time. As a home-based entrepreneur, however, you’ll soon find working with the computer in a corner of the kitchen, with the printer in the family room and your files atop the dryer in the laundry, is a recipe for inefficiency and frustration.
It’s time for a home office, not just for your convenience, but also as a selling point in the future. An office is an appealing addition to any home, whether it’s a bedroom or other small room that has been converted or a dedicated space that is often a choice in new construction.
On the other hand, it’s wise to create an office, studio, or workroom that can easily be converted to another use by a buyer who doesn’t choose to work at home.
The most popular space is a spare bedroom. Use a desk that can be closed to conceal your computer, file cabinets that can double as bedside tables, and a wall bed that, when folded up, shows nothing but a decorative panel or painting.
An alternative is to use a portion of your living or dining room, which are often near the front door. This is desirable if clients come to your home, and you may be able to differentiate the area with partitions or bookshelves.
Some people convert a garage, patio, porch or attic. This often entails building permits and considerable expense since you may need to install windows, wallboard, heat, air conditioning, and wiring.
Even a walk-in closet or storage room can serve. A skylight or light tube brightens a windowless space and scaled-down furnishings can make it appear less cramped.
The major complaint about home offices regards space—there’s never enough. Remember that while your space doesn’t all have to be in the same place, it’s more efficient if it is.
Here are some pointers:
- A professionally furnished office will make you feel more business-like. For inspiration, plug “home office” plus “design ideas” into Google. Among the 20+ million hits you’re sure to find some perfect solutions.
- Your most important furniture is a chair that fits you perfectly. “Test-drive” several and don’t skimp.
- Be thrifty on other items. Create a desk from a door atop two file cabinets. Check out garage and estate sales, discount warehouses, or Craig’s List. Consider floor models or “as-is” items.
- Have excellent lighting for your work surfaces.
- Go up the walls for storage above and even below the desk. Fit slender shelves behind a door and a foot below the ceiling for seldom-used items. Opt for modular units that can be transported and reconfigured in case you move.
- Choose desk and file units on castors so they can be stored out of the way. Fold-up tables can supply the necessary work surfaces.
- A separate business phone number with voice mail is more professional than having family members answer.
Tax Considerations
While this information offers general guidelines, remember that tax situations differ from person to person. It’s always wise to consult a tax professional.
The Internal Revenue Service (IRS) has a reputation for close scrutiny of home-office tax deductions. In fact, some people don’t deduct their office for fear of triggering an audit which means they miss out on perfectly legitimate deductions.
Remember, you have no obligation to pay more taxes than required by law and the IRS spells out its rules in Publication 587: Business Use of Your Home available at www.irs.gov. The benefit of a home-office deduction is that it can reduce your self-employment tax payments to Social Security and Medicare, which amount to a bit more than 15 percent in 2016 for incomes up to $118,500.
Your office, with minor exceptions, must be your principal place of business used regularly and exclusively for that purpose. “Regular” means more than occasional and “exclusive” means no personal use allowed. For instance, a dining room used both for meeting clients and family meals is not eligible for the home-office deduction.
While an office in a separate room is easily identifiable to an auditor’s eye, space that is clearly demarcated by partitions or moveable walls is acceptable. Your office is deducted as a percentage of your total living area. (Tax software does this for you.)
Self-employment earnings are reported on a Schedule C and Form 8829 addresses the home office. A percentage of some Schedule A-deductible items including mortgage interest and property taxes are deducted on 8829 in proportion to the business area of your home.
In addition, some ordinarily non-deductible items such as utilities, rent, or repairs to the property may be deductible—again in proportion to the area of your home office. Homeowners may depreciate the home-office area although this may lead to tax complications if you sell the property.
Whether or not you take a tax deduction, your home office, the furnishings and equipment used exclusively for business such as a printer, office rug or filing cabinet are entirely deductible.
A home-office deduction may not be used to create a business loss, however it can be carried forward to the following tax year. The IRS generally has three years to audit your return and longer in the case of suspected fraud, so keep impeccable records. If you move, take pictures of your home office. In the event of a subsequent audit, a picture is worth a thousand words.
Marilyn Pribus and her husband live near Charlottesville. She has deducted home office expenses without being audited for many years, but learned recently that as a freelance writer and musician, she must have an Albemarle County business license.