Focus on Consulting: When Home is Where You Do Your Job |
The freedom to be a consultant or independent contractor (C&IC), to work on your own, to work at home, to "tele-commute" has become one of the principal aspects that entices otherwise happy, healthy, sane people to leave their jobs and hang out their shingles. But like nearly every other aspect of being independently employed, working out of the home presents advantages and disadvantages in such areas as lifestyle, professionalism, and tax considerations.
This month we'll have a look at some of these considerations. Remember that I am not an accountant or tax expert. The material presented here is the result of research and experience, not education and training. Always consult a qualified tax accountant as part of your standard business practice.
The first thing on many lists of "what to do now that I am self-employed" is often "rent office space." After all, when you worked as an employee, you went to your employer's office, right? So why not rent an office of your very own now that you're on your own?
To be sure, the trappings of renting office space pique my interest every eight months or so. Having a comfortable place at which to meet clients can he an important aspect of conducting business. Mostly, though. I could actually "go home from work" at day's end, and leave my office and troubles behind.
I resist, ever seeking new ways to put more equipment into my now crowded in- home office. I resist because I like being able to walk to work (thirteen steps down to the lower-level, through the laundry room, and into my two-room "suite"). I resist because I absolutely hate the idea of paying to rent space.
Renting office space can place an unnecessary financial burden on any business, costing upwards of $1.50 per square foot per month. That's $340 a month for an office 15 feet square (a snug fit for a workspace) and up. Add to that electric service, telephone (at business rates), cleaning, answering service, insurance, parking, and the like. Soon you're carrying $1000 per month in overhead, and that's before you get down to business.
I know a few self-employed consultants ("selfers," I like to call them), who have never really "set up an office" in their home. Whenever they work a project, they drag out the computer and drawing board and lay claim to the living room, dining room, kitchen table, or whatever open space they can find. I often find myself wondering how they do it and what spilled lasagna looks like on print masters.
There are many good reasons why your in-home office should be a place apart from normal household traffic. Prime among them is that IRS regulations require such an arrangement if you plan to deduct a portion of your home operating expense as a business expense. According to the IRS, an in-home office must be used solely for business purposes, not have a bed or television, or be put to use for non-business purposes. Guest bedrooms simply do not qualify.
Another good reason to have a separate place to do business is that your spouse, children, and pets have a much better chance to survive your consultancy if you can close the door to your office. You'll be less distracted when you work and less apt to lose important materials when you sleep if you can "shut out the world" and have some semblance of a private office.
Once you have set aside your "office space," you can begin to deduct a portion of various household operating expenses as indirect business expenses. Such expenses include:
To determine what percentage of such expenses you can deduct, divide the total square footage of your home (including basement) into the square footage devoted to your office. This yields a percentage of operating expenses that are deductible business expenses. (IRS Publication 587, Business Use of Your Home, and IRS Publication 523, Tax Information on Selling your Home, provide a wealth of detail on this whole issue. Put them on your "must read" list.
Christopher Julliet is the C&IC PlC Manager