“52% of all small businesses are home-based.” – Survey of Business Owner, US Census
Since 2007, there has been an increasing trend of home-based entrepreneurs, with more than half of them being women (58.2 percent). Why are more and more small business owners looking to operate their new or existing business at home? What are the advantages, disadvantages and tax implications?
I. Your home-based business could be an exploratory and testing phase of your business. Since half of new businesses fail within the first three years, trying out your new business idea at home is a great way to test the market without expending a lot of overhead (office space, equipment, utilities) or a lot of risk.
“What do Apple Computer, Hershey’s, Mary Kay Cosmetics, and the Ford Motor Company have in common? These well-known corporations all started out as home-based businesses.” – The US Small Business Administration
II. Home-Based business translate into lower costs for your customers (and a competitive advantage for you). How? With a home-in-office scenario, you will be avoiding a large percentage of traditional business’ overhead costs which includes rent, utilities, phone & internet service, and your commuting gas mileage to and from your office (not to mention wear and tear on your car and possible parking fees).
Without these costs, you will give your an advantage over your competitors that allows you to be more flexible with pricing your products or services.
III. Save Time in Commuting, and Time is Money. According to the US Census in 2013, the average commute is 25.5 minutes each way, and significantly higher in metro areas. That is almost an additional hour a day you can spend on marketing, social media & blogging, producing revenue or for creative quiet time. You can use that extra time to dream up your next big idea.
IV. Tax Savings with a Home-in-Office Deduction. If your business qualifies, you can deduct a percentage of your home’s expenses, such as mortgage interest, property taxes, utilities and repairs and maintenance, against your business income. There are several criteria to qualify:
- You must regularly use part of your home exclusively for conducting business.
- You must show that you use your home as your principal place of business.
- Deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
- For more information: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Home-Office-Deduction
V. Freedom in Time, Space and Money.
- TIME: With flexibility in your work schedule, you can work early in the morning, late at night, at nap time, or around your kids’ or family’s schedule, which is great for working moms and dads. This offers greater freedom for women in the workplaces, and has contributed to more women owning businesses and taking a greater share of driving local economies.
- SPACE: Also, in the freedom of your own space, you have no dress code, no set work schedule, no office politics, or no time-wasting water-cooler gossip sessions. Without bosses, supervisors and managers, no one is watching over your shoulder and scheduling endless deadlines on your schedule.
- MONEY: Financially, you also have the freedom of earning a large percentage of your profits without the overhead, your profit margin is directly related to how hard you work (instead of waiting on promotions and pay-raises), and you have the added benefit of saving money on food costs by eating & drinking coffee at home.
Although Home-Based Businesses offer an array of advantages, not all industry can successfully or legally operate inside a private residence. And for those who choose this alternative work situation, there are a number of challenges that can arise. Next week’s blog post will discuss some of these challenges and how to overcome them.