ComplianceFinanceTax & AccountingJanuary 18, 2021

Home office vs. leased office space -- Reasons to get out of the house

Operating out of the home can be a big plus for many small business owners. By significantly lowering your overhead expense, you can improve your profit margins in good times and reduce your risks if the business cycle heads down. What's more, if you qualify for the home office tax deduction, you can turn normal household expenses like insurance and utilities into deductible business expenses and take a depreciation deduction on part of your home if you own it.

So why doesn't every small business owner stay home?

One big reason is government regulation. You generally can't run a restaurant or heavy manufacturing concern out of your home -- the health, environmental, and other regulations that prevent it make sense to almost everyone. However, even "white collar" businesses may be precluded by zoning regulations in many localities.

Zoning regulations can impose a host of restrictions on would-be home-based entrepreneurs. Local rules may forbid separate structures used exclusively for business or signs that indicate your location. They may also restrict the amount of home space you can use exclusively for your business, or limit parking, customer visits or the number of employees you can have. Some localities prohibit all types of home businesses, and some list specific types that are or aren't permitted. In addition, some localities permit home businesses, but require you to register and pay an annual fee for the privilege.

One way to avoid zoning problems is to relocate to an area that doesn't have them. Many rural or unincorporated suburban areas permit just about any otherwise legal business to be run from home and will even allow you to build separate structures if you need them. Once you have lawfully run the business from home, "grandfather" rules may allow you to continue even if the locality later passes a restrictive ordinance.

A second reason why some entrepreneurs might opt out of home work is the same reason other people love it: the distinction between "work" and your home life gets blurred. On the one hand, you may be able to work any time you want; on the other hand, you may feel obligated to work much longer hours when there's no reason to "go home" at the end of the day. Furthermore, you may become distracted by family members, phone calls, personal obligations, the television or the refrigerator. Working at home can require much more discipline and more scheduling on your part to get things accomplished.

There are a number of strategies for coping with these "working lifestyle" issues. You could make a point of dressing for business every day, and going through a ritual every morning to get yourself in the mood for work. This can be as simple as shutting the door to the home office and turning on the computer, but it serves the purpose of focusing your energies on the job. Make a practice of using an answering machine to screen all personal calls during your business day, or attend networking lunches several times a week to avoid feeling isolated. Only you can tell whether you'll be able to overcome these potential problems, because they're based on your personality, working style, and your family and other individual circumstances.

A third group of reasons for not working out of the home are those that are internal to the business itself. Businesses that need a great deal of space or that need bulky equipment are obvious candidates for outside offices. But some businesses that don't need to be operated from outside offices can benefit from them.

For example, many professionals find that having an office in a tony location with a level of "plush" adds cachet to their business and draws more clients -- and allows them to charge those customers higher rates than they otherwise could. For businesses that rely heavily on walk-in customers, locating an office on a high-traffic street and having a highly visible sign also makes sense.

Some businesses operate most efficiently when they are located close to customers, suppliers, or certain other facilities or businesses. For example, law offices are often located close to the county courthouse, in part to minimize the time spent running back and forth to court. Also, many customers or clients seem to feel that a business with a permanent address other than someone's home is less likely to be a fly-by-night operation, and more likely to be able to deliver on guarantees.

Another consideration that you may want to think about, particularly if your business is mature, is that businesses with outside locations tend to be easier to sell and to bring higher prices. For one thing, the new owner doesn't have to scout out a new location and go to the expense of moving; for another, customers and clients are already accustomed to visiting a particular office and can continue to patronize it despite the new ownership.

Finally, don't forget that commercial real estate can be a great investment. If you have the means to make a down payment on a small office building, you may be able to cover all or most of the mortgage, taxes, insurance and other costs with rent from other tenants. If all the pieces come together correctly, you might be able to use one of the offices yourself, rent-free.

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