It may be a corner of a spare bedroom and nothing more than a desk. Or it could be one whole floor of the house filled with the latest computer and communications devices. Whatever its size, the home office is common in American business today. Because many professionals maintain two offices, a growing number are equipping their home computer with a modem that allows them access to their office computer files.
While the home office may be considered a new wrinkle in business, the truth is that working away from home is the new wrinkle. For years farmers have used the kitchen table for their record keeping, and pub owners and shopkeepers lived on the second floor of their building. It has only been in the last two centuries that professions such as lawyers, doctors, and accountants have moved from their home offices into office buildings.
The National Home Office Association, a membership organization for home office workers, reported that as of 1997 an estimated 43.2 million people in the United States worked at home in some capacity. Nearly 60 percent of home workers were self-employed, and the remainder were telecommuters and other corporate employees who perform some of their work from home.
Most people who establish home offices do so by repurposing an existing room, such as a bedroom or a living room, but demand for home offices has been so great that many architects and builders have begun to routinely plan new homes with a designated room for an office. Whether office space is designed or adapted, requirements for such a space vary with the kind of work to be performed within its walls. In most cases the room needs to be wired for phone and Internet access and requires space for a desk and any computer or electronic equipment that will be used, such as fax machines and photocopiers. Some home workers also need to set aside meeting space and furnishings for clients who visit. A related consideration: people building or buying a new house often ask the builder to include an office entrance separate from the residential entrance.
There is nothing complicated about setting up a home office. Today, most have a computer equipped with a variety of software, including e-mail and web-browsing applications, and a high-quality computer printer, preferably laser. Other helpful tools include a fax machine (or fax modem with the computer), a photocopier, a dedicated line for Internet access (standard phone line or one of the high-speed formats), and voice mail.
The most important aspects of setting up a home office are the potential tax and legal implications. Home office operators may claim a deduction for those offices on IRS Form 8829 (Expenses for Business Use Of Your Home), which is filed along with Schedule C (Profit or Loss from Business). There are restrictions, however, which are covered in IRS Publication 587 (Business Use of Your Home). Failing to abide by these restrictions may put a red flag on a home office user's return, which could result in an audit.
In general, a home office deduction is allowed if the home is the principal place of business, is the place where the business owner meets to deal with clients and customers as part of the normal business day, or is a separate structure on the property. The deduction is figured on the size of the home office as a percentage of the total house or residence. For example, if the total house size is 2,400 square feet and the home office is 240 square feet, ten percent of the total house is considered used for business. That would allow the homeowner to take a 10 percent deduction on the electricity, real estate taxes, mortgage interest, etc., used as a business expense.
However, the home office deduction cannot be used by everyone who has a home office, although recent trends have been toward loosening these restrictions slightly. A U.S. Supreme Court decision made the home office deduction more difficult to apply outside these very carefully worded restrictions. In a tax court case, a doctor worked in three different hospitals, but had no office in any of them so he claimed a home office deduction that he said was necessary to keep up with his billing and patient records. The Court ruled that since he spent most of his day visiting patients, the hospitals were his principal place of work, so his home office deduction was denied.
This ruling, which more narrowly defined the concept of "principal place of business" affected a large number of people, particularly professionals such as sales agents who see customers at the customers' places of business. However, since 1999 a revision of the tax law allows some home offices that do not generate revenue to nonetheless count for deductions. Qualification for such deductions remains subject to meeting standards set by the IRS. Likewise, a second job conducted exclusively from the home office may qualify for the deduction.
A home office deduction is still possible, if it is set aside exclusively to meet clients or customers, even if it is not always the principal place of business. The IRS uses an example of a lawyer who works three days in an office and two days at home in an office set up so clients come to his home. The last test for an unchallenged home office deduction is that it can be a separate structure such as a studio or garage apartment that is essential for running the business, for example, a floral shop owner who runs a greenhouse on his property.
The IRS maintains a myriad of rules that apply to home offices, including depreciation of home, depreciation of equipment, how to recover that depreciation if the home is sold, etc. One important thing to note is that the monthly residential telephone charge cannot be deducted, even if most of the calls pertain to the business. However, long distance business related calls can be deducted. Often individuals should consult a tax adviser to stay within the law on home office deductions.
Besides the IRS regulations, some municipal governments have zoning laws that restrict and/or license home offices. Originally designed to protect residential neighborhoods from becoming commercial zones, the zoning laws have sometimes been strictly interpreted to keep residents from conducting any sort of business from their home, even if it doesn't have a commercial impact on the rest of the neighborhood. People wishing to set up home offices should check with their city's zoning office and licensing board for restrictions that may apply to the city, or even to their particular neighborhood.
The popularity of working from home has led to a growing support network serving the needs of home workers. Aside from the ubiquitous office-supply chains that offer diverse selections of equipment and supplies, there are membership groups such as the National Home Office Association and the American Home Business Association, which can assist members with acquiring insurance or obtaining information on various business topics. The rise in home offices has not gone unnoticed in the publishing world, either, as a variety of books and magazines directed at home workers have flourished, including such periodicals as Home Office Computing (with 500,000 readers as of 1998), Home Business Magazine (circulation of 75,000), and Entrepreneur's Home Office Magazine.