The thought of rolling out of bed and going to work a few steps away is an appealing one. But while setting up a home-based business can have its benefits for those who are disciplined enough to make it work and have the available space, homeowners need to carefully consider what’s involved – including legal, tax, insurance and resale ramifications.
Richard Houston, who owns and operates several websites from his office adjacent to the laundry room in his home near Los Angeles, said the perks of running a business from home are plentiful, including business tax deductions, lower out-of-pocket costs and flexible work hours. But he warned that many municipalities have zoning restrictions and other requirements that limit or prohibit operating a commercial enterprise out of your place of residence.
“You need to find out what restrictions exist because some cities even have substantial hidden taxes, fines and other penalties attached to operating a business out of your home,” Houston said.
Christine A. Reuther, tax attorney in Radnor, Pennsylvania, agreed.
“Check with local authorities first to determine if zoning and other code restrictions apply, which will depend on the type of business and where it’s located,” she said. “Additionally, some municipalities require a business license.”
Even if community rule makers gives you the green light, you want to make sure that you don’t incur the wrath of your neighbors, said William Curtis, a Realtor with Nankani Management in San Antonio, who also has an home-based business. When Curtis has to meet a client or has a meeting, he meets them at a nearby coffee shop or rents out a conference room.
When it comes to federal and state income taxes, a home business may provide an opportunity to deduct some expenses, such as a portion of your utility expenses, office equipment and mortgage interest paid. In addition, some portion of the home itself may be depreciable.
“The keys to understanding what you can deduct are determining what portion of the house is used for business, realistically assessing whether the space and equipment set aside for business use are exclusively for business use, and, if necessary, tracking business and non-business use of dual-purpose items,” said tax attorney Reuther. She recommends consulting with an accountant to determine your deduction eligibility. “Keeping records is critical to supporting the deductions being claimed and to make sure you expense items appropriately,” Reuther added.
In general, your property taxes shouldn’t be affected by creating a home business unless you finish space that was unfinished the last time your house was assessed, such as a basement.
To keep your property’s value as high as possible, Gary Klein, founder of Cornerstone Real Estate Organization in Lincroft, New Jersey, suggests keeping your home office space flexible without making too many major modifications, “You don’t [want to] lose a potential buyer who, instead of a home office, would rather have an extra bedroom or a basement for their kids to play in,” he said.
Also, don’t just assume that your current homeowners insurance policy will cover a claim made involving your home-based business. Any business, regardless of its scope or location, should have a commercial general liability insurance policy and applicable errors and omissions insurance.
Lastly, it’s crucial to evaluate how the business might affect your home’s resale value, which ties into your choice as to where to locate the office within your abode.
“If at all possible, have a separate office with a separate entrance,” said Bill Horne of William Warren Consulting, a firm Sharon, Massachusetts, that helps home-based business plan, construct and maintain offices.