Should Your Small Business Use a Home Office or Rent Space?
Is this a financial decision, a marketing decision or a self-discipline issue?
From a financial standpoint it is clearly cheaper to use a part of your home, rather than paying rent. In Canada you are allowed to deduct home expenses from your self-employment income, provided that you are showing a profit from your home based business. The deduction is based on the percentage of the home that is being used for business. If you are using one room out of a 9 room house then you can deduct 1/9 of your expenses. The types of expenses that can be deducted are rent, mortgage interest, property taxes, light, heat and insurance. So a home office deduction is an advantage, odds are that having an office in your home does not create a lot of new expenses and you get to write off a percentage of the expenses that you already had. However you do have to earn a profit to get the benefit of these deductions. If your business does not earn a profit then your home expenses can be carried forward to the next taxation year and be deducted then, if that year is more profitable. The home expenses can actually be carried forward forever, but hopefully you do not need forever to show a profit from your home based business.
If you decide to work in an office outside your home then you will have to pay rent. The rent you pay will also be a deduction on your income tax return but this is not an advantage as you had to actually spend the money to get a deduction. Deducting your home expenses is better financially because you have those expenses anyway. From a marketing standpoint there is a perception that a home based business is not as successful as one that has outgrown the home. If you have no intention of growing your business beyond the one person stage then this perception is of no concern to you. However, there may be some clients who will need more convincing that you are the correct choice for them if your business is perceived as being small time. Maybe these are not the sort of clients that you want anyway!
An issue may be your ability to actually get work done. Some people are distracted by the operation of a home and end up spending time doing laundry or chatting to neighbors when they should be working. Others find that having their office in their home means that they never stop working. There can be a benefit to separating your office from your home. If you tend to over work, then having a separation between work and home life could benefit you in setting those limits. If you tend to have trouble getting your work done, then perhaps having the discipline of heading to an office and staying there could do the trick.
To summarize, the home office is likely the best bet for a new business, to reduce costs until such time as the revenue is flowing. Once there is some growth in the business there are advantages to making a move out of the home.
Debi J. Peverill CA is an accountant with a sense of humour. She has written 11 books for business owners and is in demand as a speaker. Learn more business strategies at http://www.Peverill.ca