According to the U.S. Small Business Administration, roughly half of all businesses in the United States are home-based. Over two-thirds of all sole proprietorships, partnerships, and S corporations are home-based. More than 60 percent of home-based businesses are in the service and construction sectors, with heavy concentration in personal services like salons, financial services, real estate and small retail.
The SBA hasn’t updated their figures since 1992, but the last time they surveyed, more than 90 percent of home-based businesses had no employees. 7.2 percent of home-based businesses reported fewer than five employees, and just over 1 percent reported 5 to 19 employees. Only about one in 500 reported 20 or more employees, which makes sense – who’s going to want 20 people tromping through their living room five days a week?
There are tremendous benefits to working from home. The commute is easy. The office environment is comfortable. Getting home for lunch isn’t usually a problem. But the tax code and local zoning codes can punish home businesses.
The SBA noted in a 2004 report that the tax code treats a home office as a piece of commercial real estate and the resident/owner as a commercial real estate investor. The office must be depreciated over 39 years, and there are adverse tax consequences if the home is sold. Most small businesses, by contrast, can pay and deduct rent. Deducting office equipment at home can be a pain in the neck, too, because the tax code demands rigorous documentation of use. And local zoning codes often prohibit most commercial activities in a residential neighborhood without a variance.
This might explain why only about nine million people have home-based businesses but only about three million people claim home office tax deductions. This IRS booklet can help.
We think you should consider moving your business out of your basement or spare bedroom when at least two of three things happen: you’ve got more employees working at your house than parking to accommodate them, you’re violating your zoning code with commercial traffic, and you’ve got the revenue to justify the rent.
Moving out of the garage is a big step, but it tells potential clients, suppliers and investors that you’re serious about your business. Sometimes, that’s worth the price of rent all by itself.
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