Home Office Benefits & Drawbacks for Small Businesses

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Despite its name, a small business is hardly small. Starting a new venture comes with myriad expenses and to-do lists. For many entrepreneurs, starting their new business from the comfort of a home office is a good idea. However, while it may work for some business owners, a home office isn’t right for every kind of business or business owner.

What Is a Home Office?

A home office is a space in one’s home that is dedicated for business use. When many small-business owners are getting started, the entire operations of their business may be conducted from a home office. As a business grows, entrepreneurs may procure additional space outside of a home office, such as a retail location. However, they may still keep a home office to carry out some other operations for the business.

Establishing Home Office Space In Your House

Determining whether a home office is right for your business begins with figuring out whether you actually have the space at home. A home office can take place in part of a living room or dining room or even a nook behind the staircase. In some cases, entrepreneurs may need a dedicated working space in the home where they can invite clients or partners.

Review the layout plan of your home and determine if there are any areas that you can dedicate to your business. A modern office can be a small space with a laptop or it can be a large room with storage solutions or fancy chandeliers. Decide how having a home office will affect the other people in your home. Are your family members able to give up their TV room space and transform it into a home office?

Identifying Your Home Office Needs

Be sure to research what your home office will need in order for you to properly operate your business. For many businesses, having office furniture and bookcases is all that is required. Others may require natural light in the office space so that they can avoid eye strain. Some may need wall art, area rugs, loveseats and coffee tables.

Depending on what kind of business you have, you may also require a storage space for your product inventory. Some businesses require access to a kitchen or a fridge or freezer. Others may need to be located close to a transportation hub or near a post office location. For others, having a room where they can have peace and quiet is all that is needed.

Other requirements you may need for your home office include:

  • A separate entryway from the rest of the home

  • A space to meet with clients, suppliers or other stakeholders

  • Special technology, machinery or equipment

  • High-speed internet and cellphone access

  • Credit card machine or another way to accept payment

  • Ergonomic home office furniture to accommodate special needs

  • Parking spaces for your clients or other visitors

  • Signage requirements for your business

  • A focus on home décor or interior design

Write down what is essential in your home office and which elements are “nice to have.” Having a concrete list of required items for your home office will help you establish a home office budget. This way, you can see whether it’s financially sound to establish a home office or if a different work environment is a better option for you.

Looking at Tax Implications

For many small businesses, having a home office is a major tax benefit. However, it’s important to understand the IRS rules so you can ensure you’re deducting your home office expenses correctly. The IRS has specific qualifications your home office must meet before you can deduct any expenses. Otherwise, your business may end up in hot water with the IRS.

Be sure to follow these guidelines if you want to deduct your home office expenses:

  • Dedicated space: According to the IRS, your home office needs to be a “separately identifiable space.” This doesn’t necessarily mean that your home office needs to have four walls and a door, but it does mean that your home office needs to be easily identifiable as a space for only conducting business. If you’re using a nook under the staircase, for example, be sure to have office furniture, your computer and filing cabinets all located in your office space.

  • Regular and exclusive use: In order to qualify, you have to prove that you regularly use your home office for conducting business. This means that you cannot share the home office with your personal life – it needs to be dedicated to your business. For example, you cannot deduct your dining room as your home office if you occasionally answer work emails at the dining table.

  • Principle place of business: This element is tricky to define, as the same rules don’t apply to all kinds of businesses. In order to deduct your home office expenses, you have to show that your home office is the main place where your business is conducted. However, if you have another location where you conduct business, such as a retail store or driving to client offices to perform services, you may still be eligible to deduct your home office expenses. If you use your home office to conduct administrative activities, such as invoicing and record keeping, then you may still be able to take advantage of the tax implications.

Keep in mind that home office deductions are based on the percentage of your home that is dedicated to your business, not your entire place of residence. For example, if you use half a bedroom as your home office, then you will need to calculate your home office expenses based on the square footage of the room and how it relates to the total square footage of your house.

Researching Applicable Laws

Before you decide to open up shop in your house, it’s important to check your local municipality’s laws regarding home offices and home-based businesses. There may be specific regulations or restrictions by which you need to abide. Some may be applicable to specific kinds of businesses, while others may affect all businesses. Keep in mind that if you’re renting your house, your landlord may need to sign off on whether you can operate a business from home or not.

If you’re in a highly regulated industry, such as food or another industry regulated by the FDA, then you will have additional laws to note. Businesses that make and sell food from home will need to be aware of cottage food laws, which differ from state to state. The laws may also be referred to as home-food processing rules or bakers' bills. These are overseen by the department of health or the department of agriculture.

Laws such as these are important to note if you’re working from a home office. While you do not need to work from a licensed kitchen and don’t need to worry about inspections, you still need to be careful about how you prepare, package, label, market and sell your products.

Saving Overhead Expenses

One of the major benefits of having a home office is that your overhead expenses are considerably lower. If you don’t have a separate location for conducting business, then you can essentially eliminate overhead costs for rent and utilities. While this is a massive savings for many businesses, it’s important to consider the bigger picture of these savings.

For example, if you did have another location for conducting business, such as a stall at a farmers' market or a retail space, would you be able to exponentially increase your sales and revenue? If that’s the case, then the savings on your overhead may not be worth it. It’s best to calculate your projected sales if you did have another business location and then weigh the costs against your savings.

Ensuring You Have Enough Family Time

Many entrepreneurs think that working from home will mean they have more time to spend with their families. Especially for those with young children, this is a major advantage of having a home office. However, it’s vital to note that having a home office doesn’t necessarily mean you’ll have more time for personal parts of your life.

In order to make time for your family, it’s important to not let work creep in on your personal time. It’s easy to answer emails while cooking dinner or take a call with a client while playing with your kids, but combining business with pleasure can take its toll on yourself and your family. Be sure to set clear boundaries between work and family so you can enjoy both.

Having a dedicated workspace can also help you separate your business life from your family life. Close the home office door when you’re not working so you won’t be tempted to go in and check messages when you should be spending time with your loved ones.

Considering Your Commuting Time and Costs

Sitting in traffic on the way to work is a waste of time for most people, especially small-business owners who have a lot on their plate. Being able to shorten your commute by working from a home office is a big benefit. If all of your business is conducted from the office, then you can easily save hours in your week. Apply those saved hours to your workday and you’ll be able to get a head start on hitting your milestones and deadlines.

However, if you also work outside the home, such as driving to meet clients, suppliers or other stakeholders, then it’s important to consider the location of your home. For example, if you live in the suburbs but your clients are all located in the city center, you still may need to commute an hour each way. Be sure to keep all commuting costs in mind when deciding to establish a home office.

Avoiding Distractions While Working at Home

While working from a home office is the right choice for many entrepreneurs, you have to ensure that you have the work ethic to avoid distractions while in your house. For example, you may find it easy to head to the kitchen and start making dinner, but that can take away from important work you may need to do. Remember to prioritize your business tasks each day so you’re able to accomplish your goals.

Establish clear working hours for yourself if you have trouble concentrating on your business from your home office. For example, if you know that every day you have to work on your business from 9 a.m. to 4 p.m., then you may get more done than you would if you didn't set clear working hours. Be sure to communicate your working hours to your family, friends and neighbors so they don’t drop by and take you away from your business.

Sometimes, the biggest distraction when working from a home office can be your family. Be sure to discuss your working routine and situation with all family members, including your children, so they are aware of the importance of letting you concentrate during working hours.