Running Your Business from Home: Pros and Cons

Home Office

While more and more people have been choosing to work from home in recent years, many have been forced to do so given the current global pandemic. Now that many businesses owners have been operating from home for number of weeks, some are considering whether they should continue to do so even after they are given the green light from the government to return to the workplaceThis article explores the pros and cons of working from home and looks at ways to make your home office experience more productive and enjoyable.  

Making the choice

Twenty years ago working from home was a rarity now home-based businesses are an important sector of the business community. Technology has vastly helped the process: with computers, smartphones, online meetings and the Internet it’s easy to be accessible and connected, and difficult or impossible for customers or clients to know where you’re operating from. In many businesses, your actual location no longer matters.

Suitable and unsuitable businesses

Suitable business types

Many types of business can operate from home. For example:

  • Service and consultancy type businesses such as freelance writers, bookkeepers, financial advisors, marketing consultants, beauty consultants and home cleaning businesses, or gardening services.
  • Technology type businesses such as website builders, IT consultants and software developers.
  • Businesses that exploit e-business potential and the Internet, such as direct marketing businesses that sell mainly through websites or mail order and don’t need retail premises.
  • Small scale or ‘close to hobby’ home industry type businesses, such as caterers, artists and bakers.
  • Part-time businesses.

A home office offers a low-cost way of trialling your business concept. Many of these businesses (such as a catering business started from a home kitchen) will have to move into commercial premises if the business grows.

Unsuitable business types

In normal circumstances, some businesses can’t be run from home. Given the current requirements with COVID-19, there may be no choice.

Home-based businesses also often have to comply with particular state, territory and local government regulations. When you use your home as a place of business, specific regulations may apply to the impact of your business activities on the surrounding residential area, such as pollution, energy use and parking. Depending on your type of business, you may need special permits relating to zoning, signage, noise levels or health issues.

Also check your lease if you’re renting. There might be restrictions you were not aware of. For example:

  • Many local councils restrict the number of employees, some stipulating that only family members or people living in the house may work in the home business. This rule is probably quite widely broken, but the intent is clear: local authorities don’t want houses taken over by a business or residential areas transformed into commercial areas. Nor would neighbours necessarily put up with employees’ cars clogging the streets and creating extra noise.
  • Noise creating businesses such as panel beaters or sheet metal workers are not suitable. Most local councils or regional authorities have restrictions on trades or light industries operating from residential areas. There are good reasons for this beyond the obvious excessive noise factor. For example, trade type businesses operating from houses can lower property values in the area. It is no longer truly residential.
  • Retail businesses or businesses that attract a lot of customers are generally prohibited. Neighbours will most likely object if there is a constant stream of cars to a certain house in a street.
  • Businesses that need to store dangerous goods or chemicals.
  • Businesses that need to project an upmarket, professional image or enhance their market credibility, or have regular meetings with clients or customers. It’s fading, but there is still the perception out there that home offices are not quite professional. Very few home offices fall into the really impressive category.  If image and credibility are important and you do get customers or clients visiting you, it may pay you to rent an office in a serviced suite of offices, where you get a reception desk and waiting area, use of a meeting room, plus other shared business equipment items that are not cost-effective investments for the average home office.

Benefits and drawbacks of working from home

Benefits

  • No commuting and lower transport costs. As one home office person comments: “My cars last much longer now. I do only about 5,000 km a year, compared to 12,000 km formerly and the car spends a lot of its time in the garage, protected from the sun and weather.”
  • Instant access to your office. No worries about leaving something at work.
  • Cheaper costs, particularly rent. Office rent can be a significant expense for most start-up businesses. Depending on the area you live in and the level of service and size of office you would require, the saving might be anything from $20,000 to $45,000 a year or more.
  • You can share some of the costs of running your home, such as telephone, rates and electricity expenses.
  • You can wear what you like in your own office and save on business clothing.
  • Many home offices offer more tranquil work environments than industrial or commercial areas.
  • You save commuting time and the stress involved. In the larger cities, both time wasted and stress can be significant burdens.
  • Technology is making it ever easier for you to operate from home. Technology permits ever more mobility.
  • You may have the option to choose your own hours. For instance, some people prefer working late at night, when the rest of the house is asleep, which can positively impact productivity.

Drawbacks

  • Your office is always with you. The advantage of being close to your children can be offset by the disadvantage of the interruptions.
  • The office space might be inadequate. Poor fit-outs and space problems characterise many home offices. Not everyone can dedicate a room to business or have a separate entrance.
  • It can be difficult to maintain focus, motivation and disciplined work routines.
  • IT issues can arise, particularly with Wifi networks and broadband speed, impacting the efficiency of work and communication.

Change of mindset

Some people continue to thrive in home businesses, others do eventually need to get out of a home office to change their mindset and convince themselves that they own a ‘real’ business. Many people experience a rise in the level of professionalism they personally feel and hence are able to project to the market when they move into conventional offices.

The move can spark a real growth phase for the business. It all depends, of course on you and your attitude.

Is there a tax advantage?

There is a widespread myth that home offices offer significant tax advantages. In fact there is no difference in principle between deductions available to home office businesses and those available to businesses in conventional offices. In general terms, you can deduct all expenses directly related to generating your business income. The only real difference with a home office is that you have to work out how much of the home is used as an office (or how often it is used as an office).

A common way to do this is to work out the size of your office as a percentage of your house. For example, if the office occupies 10% of the floor space of the home, then you would generally be able to deduct 10% of the council rates (if you own the house) as a business expense. In the case of electricity costs (keeping the office warm in winter and cool in summer) you might feel that the office consumes more than 10% of your home electricity bill (particularly if significantly higher home power bills prove this). Your Allan Hall Business Advisor can guide you on what might be an acceptable deduction and the calculations for this.

Capital Gains Tax Implications

When deciding whether to run your business from home, the implications of Capital Gains Tax (CGT) must be considered when its time to sell your home. In most cases, CGT won’t apply when you choose to sell your home, however, if your home was used for your business, you may be required to pay CGT.

You will not have to pay CGT if you operated your business from a rented home, if you didn’t have a designated area of the home for business-only activities, or if your business is operated as a company or trust.

For detailed examples and further information regarding the implications of CGT and your home office or business, please click here.

Insurance tip

Speak to your insurance broker or agent about possible insurance changes or extra cover on office equipment used at home. Home contents type insurance policies often don’t cover equipment used for business purposes. If you’d like speak with one of our business advisors, we can give you more detailed advice about how and what you can deduct as legitimate home office expenses.

Conclusion: reward yourself!

Succeeding in a home office does take some extra discipline and adaptation. Remember you’re part of a good tradition. Successful multinational corporations have been started in suburban garages: Apple Computers and Hewlett-Packard are just two examples. If your business grows you too will probably have to move someday. In the meantime, enjoy the benefits of working in a home office and remember to reward yourself regularly for your achievements.

Please don’t hesitate to contact our team at Allan Hall should you have any questions.

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