Tax Lawyer's Blog

In May I wrote a post titled 59 Tips for the Self Employed in which I suggested that new business owners not work from their homes so as to avoid distractions like the refrigerator, the T.V. and the bed.

Many readers and most of my fellow tax bloggers disagreed with me.

Now here comes Matthew Bandyk of U.S. News & World Report and in an article titled The Perils of Running a Business From Home provides some additional reasons why you may want to think twice before running your new business from your home:

Zoning:

The very act of launching a home business could be illegal. Almost every local government has zoning ordinances that limit how much business activity can go on in a residential area.  

Home-office deduction:

If your office is in your home, you have to determine how much of your home is taken up by your office. You can deduct a portion of rent, mortgage interest, and other housing expenses from your taxes—but only the exact percentage that corresponds to the size of your office.

But it’s not as easy as simple math.

“You almost have to be a CPA to figure out [the] form,” says Keith Hall, tax adviser for the National Association of the Self-Employed. “The phrase ’see instructions’ appears 14 times on a one-page form.”

My Observations:

1. It has been my experience that small business owners who operate their businesses from their homes are more likely to commingle their business and personal funds and more likely to fail to keep adequate business records. I believe this is because setting up a dedicated, outside office has a way of lending a seriousness to the new enterprise that the home-based business often lacks.
2. Home office deductions are an IRS red flag because they are so often abused. This means, all other things being equal, that a tax return with a home office deduction is going to get more IRS scrutiny than a tax return without one.

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