Home office 101: The ins and outs of taxes and regulations

July 8, 2011

While quality-of-life reasons may help explain why roughly half of U.S. businesses are home-based, there are plenty of financial reasons to go the “homepreneur” route.

If you use a part of your home for business, you may be able to deduct expenses from your federal income tax, including mortgage interest, insurance, utilities, repairs and depreciation of the business portion of your home.

But to qualify for these deductions, you must meet two basic requirements.

First, you must use part of your home regularly and exclusively for conducting business. Occasional or incidental use will not qualify for the home office deduction. Any personal or mixed use of your home office will also disqualify your deduction.

Second, you must use your home as your principal place of business. There are two ways to satisfy this requirement. You must use your home office regularly and exclusively for the administrative or managerial activities, such as bookkeeping, ordering supplies and making appointments. You can’t conduct these tasks in another fixed location. Alternatively, you can qualify for the deductions if you physically meet with patients, clients or customers in your home and their use of your home is substantial and integral to your business.

If you determine that you can deduct your home office expense, you must figure out the percentage of your home that is used for business. That percentage can be calculated by figuring out the square footage of your home office in relation to the total square footage of your home. For example, if your home is 1,500 square feet and your home office is 150 square feet, then your business percentage is 10 percent. You can then, subject to certain limitations, deduct 10 percent of your total home operating costs.

The Internal Revenue Service provides detailed information on tax deductions related to your home-based business in “Publication 587,” which is available online at www.irs.gov/pub/irs-pdf/p587.pdf.

There are also many logistical issues to consider before you set up a business at home.

Such businesses are regulated at the local level with varying degrees of detail. Local zoning ordinances specify the percent of square footage that you can use, the number of employees you may employ, the number of guest vehicles that you can have parked outside your residence, the number of visitors you can have per day, and the type of signs you may use. All jurisdictions require you to obtain one or more business and/or professional licenses in addition to a specific home occupation permit.

All common ownership communities have additional rules. Homeowner’s associations, planned unit developments, and co-ops regulate what types of businesses, if any, you can operate from your home. Before you get too far into your home-based business plan you should consult your association’s covenants, conditions and restrictions, “House Rules” or by-laws to see if a home-based business is permitted.

In the District of Columbia, homepreneurs may not use more than 25 percent — or use more than 250 square feet — of their home for business purposes. They are also limited to one non-resident employee, two business vehicles, and eight visits per day by customers, delivery people and other visitors. Although the District does allow external signage, it is limited to one flush mounted sign no larger than 144 square inches.

D.C. residents can download the Home Occupation Permit Application from the DC Department of Consumer and Regulatory Affairs at www.dcra.dc.gov/DC/DCRA/Permits/Certificates+of+Occupancy+and+Zoning/Get+a+Home+Occupation+Permit. But they must apply in person.

Arlington County has similar rules, but it is more mindful of neighborhood aesthetics. There can be no signs or other visible evidence outside the home of the home-based business inside.

But Maryland’s Montgomery County rules may rank as the region’s most painfully detailed. It divides home occupations into three main categories — No Impact Home Occupations, Major/Registered Home Occupations, and Home Health Practitioners. And it applies some different rules to each.

The rules, enforced by the county’s Department of Permitting Services, cover the basics regarding the percent of the home that can be used for business purposes and the limits on the number of employees. The details can be found at permittingservices.montgomerycountymd.gov/permitting/pdf/HomeOccupation.pdf.

But some of the county’s regulations border on the ridiculous. For example, employees are barred from picking up their paychecks at a registered home-based business. Although the level of detail in many of the regulations is almost comical, the penalty for violating the county’s rules is no laughing matter: $500 a day.

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.

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