What Happens If I Run My Business out of My House?

Many small businesses are run out of a portion of the owner's house, such as the basement or spare bedroom. It's only fair that the business should pay for a portion of the costs of running your home.

You need to be careful here. Some owners who do not want to be bothered to calculate utilities and other expenses just charge a flat rent to the company. This tactic puts them on dangerous tax ice, as they have now created rental income for themselves personally. If they don't want to be taxed on all that money, they will have to calculate utilities and other expenses anyway to deduct from that income. It's better to bite the bullet and realize that calculating how much it costs you to run your business from your home will take a bit of time. Keep it as a simple reimbursement of actual expenses, and your life will be much easier!

Here's a simple two-step process to help you calculate how much of your home expenses you can assign to your business.

Step 1: How much space?

To figure out how much of the expenses belongs to the business, you need to calculate how much space the business takes up in the house. First, calculate the entire square footage of the living spaces of the house. Living spaces do not include unfinished basements or attics or unheated garages or outbuildings. This may sound obvious, but make sure that you include the space that the business occupies in the calculation. For example, if your basement is mostly unfinished, but your office takes up a 10 X 10 space in the only finished part of the basement, make sure you are including that hundred square feet in your total.

Once you have calculated the total square footage of the house, you need to calculate the square footage of the office area. Start by measuring the rooms used only for business. If you have a room that is never used for anything but business, calculate the square footage of that room (multiply the length times the width). Next, look at the rooms that are used partly for business. This area gets a little gray so you may want to discuss it with your accountant. Let's look at a couple of examples so you know what I mean.

• A side entrance and hallway leads directly into your office space and is never used to get to other parts of the house. This area would be considered business square footage.

• A dining room is used for business seven hours a day and for family meals and activities the rest of the time. This area needs to be split by usage. For example, if the dining room is 10 X 12, the total square footage is 120. However, the room is used only for business purposes seven hours a day. The business square footage is therefore 120 X 7/24 = 35 square feet.

• Once you've calculated the business square footage, you will know how much of the house the business takes up. For example, if the house is 2,000 square feet, and the total business usage is 250 square feet, you would arrive at the percentage of the house the business takes (the business percentage) up by the following calculation: 250/2,000 = 12.5%.

Step 2: Calculating the expenses

Which household expenses should the business share with you? Here are some of the common operating costs of a home:

• Property taxes

• Heat

• Electricity

• Water

• Mortgage interest

• Repairs and maintenance

• Home Insurance

Even if you rent your home or apartment, you can apportion a part of your rent expense to the business.

Total up all your expenses, then multiply by the business percentage. That's all there is to it.