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Home Office Help
Practical advice for running a business from the spare bedroom, by someone who does

Hello and welcome. I'm Diane C. For six years I did bookkeeping for small businesses out of my house. Two years ago the questions I was getting had drifted from "can you reconcile this" to "how do I set up a business at all," so I changed my letterhead and now I consult on exactly that: getting a small business or a home office up and running, organized, and out of trouble with the IRS. I still work from the spare bedroom. It has a door, and the door has a lock, and both of those are on this page for a reason.

I started this page because I kept e-mailing the same advice to people. Now I can just send them here. Nothing on this page is legal or tax advice for your particular situation; it's the general lay of the land as of fall 1999. For your own return, talk to a professional (I recommend one at the bottom).

Jump to: The Home Office Deduction · Separate Your Money · The Second Phone Line · Buy the Good Chair · 1999 Equipment List · Kids and the Office Door · Working Alone · Y2K

1. The Home Office Deduction, in Plain English
The two words that matter are exclusive and regular. To deduct part of your home as a business expense, the space has to be used only for business (not the dining room table where the kids also do homework) and used for business regularly (not the guest room you work in twice a year). It doesn't have to be a whole room; a clearly separate part of a room can qualify, but there's no line down the middle of the carpet that the IRS will believe, so make it obvious.

The space also has to be your principal place of business, or a place where you meet clients or customers in the normal course of business. This is where the good news comes in. Under the old rules, if you did your actual work somewhere else (a plumber, a salesperson on the road, a consultant who works at client sites) and only did the billing and paperwork at home, the home office usually didn't count. Starting with tax year 1999, the law changed: your home office counts as your principal place of business if you use it for the administrative and management work of your business and you have no other fixed location where you do that work. For a lot of people, this is the first year the deduction is even worth looking at. Ask your tax preparer about it this coming spring.

If you qualify, you figure the business percentage of your home (square footage of the office divided by total square footage, usually) and take that percentage of things like rent or mortgage interest, utilities, insurance, and repairs, plus depreciation if you own. It goes on Form 8829 and flows to your Schedule C. The deduction can't be more than the profit from the business, though the unused part carries forward.

Three cautions:
  1. Measure your office and write down the number. Keep a sketch. Take a picture. You'll want it if anyone ever asks.
  2. If you own your home and take depreciation on the office, there can be tax consequences when you sell. This is the number one reason to talk to a professional before you take the deduction, not after.
  3. "Exclusive" means exclusive. If the office is also where the treadmill lives, it doesn't qualify. Move the treadmill.

2. Separate Your Money. Today.
Open a separate checking account for the business. Get a separate credit card that's only for the business. Every business dollar goes in and out of those, and only those. Pay yourself by writing a check from the business account to your personal account.

Why I nag about this: when your business and personal money are mixed, you can't tell how the business is doing, your bookkeeper (hi) has to charge you for hours of sorting, and at tax time every expense is a judgment call. Separate accounts make it obvious. It's the single cheapest piece of advice on this page and the one people ignore most.

While you're at it: keep every receipt (a shoebox is fine, an envelope per month is better), write what it was for on the receipt, and put 25 to 30 percent of what you make into a savings account for taxes. When you work for yourself, nobody withholds anything. You'll owe income tax and self-employment tax, and you'll pay it in four estimated installments during the year. The first spring this happens to people is not pretty. Set the money aside as it comes in and it's painless.

3. Get a Second Phone Line
You need one line for talking and one for the fax and the modem. If you're online checking e-mail and a client calls, they get a busy signal. If your teenager is on the phone and a client tries to fax you, same thing. A second line runs maybe twenty dollars a month in most places, and the business line is a deductible expense (the first line into your house generally isn't, even if you use it for business; the second one for the business is).

Plug the fax machine and the modem into the business line. Give clients the business number. Put an answering machine on it with a short, professional message, and turn the ringer off after six o'clock. Nobody needs to hear your business line ring during dinner, least of all you.

If you can afford it, a distinctive-ring service on one line is a cheaper half-step: the phone company gives you a second number that rings differently on the same line. It doesn't solve the modem problem, though.

4. Buy the Good Chair
You will spend more waking hours in your office chair than anywhere else. I sat in a dining room chair for my first year and a $39 office-store chair for my second, and I paid for both of them in visits to the chiropractor. Go to an office furniture store, sit in the chairs, and buy one with adjustable height, adjustable arms, and real lumbar support. A good used one from a business that's closing or upgrading is a wonderful deal; the office furniture dealers in the phone book usually have them. Expect $150 to $300 used for a chair that would be $500 or more new. It is the best money I have spent on this business, including the computer.

The same goes for the desk height and the monitor height. Your elbows should be at about ninety degrees when you type and the top of the screen should be about at eye level. A phone book under the monitor counts.

5. What's in My Office (Fall 1999)
People always ask, so here's what's on the desk right now. You don't need all of it on day one. Get the computer and the printer, then add things as the business pays for them.

ItemWhat I have and why
ComputerA Pentium II, 350 MHz, 64 MB of RAM, 6 GB hard drive, running Windows 98. Bought in early 1998; still plenty for bookkeeping, word processing and e-mail. You do not need the fastest machine in the store. You need one that's reliable, and you need to back it up. I use a Zip drive and rotate two disks, one of which lives at my sister's house.
MonitorA 17-inch. Went from 15 to 17 last year and my eyes thank me daily. Worth it if you look at spreadsheets all day.
PrinterA laser printer. Mine is a used LaserJet 4 I bought for about $300, and it has printed thousands of pages without a complaint. Toner costs more than an inkjet cartridge but lasts twenty times as long, and invoices and letters look professional. An inkjet is fine to start; you'll want the laser by year two.
ScannerA flatbed scanner, the kind you lift the lid on. I scan clients' receipts and signed forms and keep them on the hard drive, which has saved me twice when the paper went missing. Also good for logos and letterhead.
Fax machineA plain-paper fax on the second phone line. Yes, the computer can send faxes with the modem, but receiving them on the computer means the computer has to be on all the time, and clients fax at strange hours. The stand-alone machine just works.
Modem56K, external, so I can see the lights. E-mail with clients, and I check the bank's web site.
SoftwareQuickBooks for my books and my clients', Microsoft Office 97 for letters and spreadsheets, Netscape for the Internet. Plus a good virus scanner, updated monthly. You will get e-mail attachments from people who mean well.
OtherA battery backup (UPS) between the wall and the computer, because we lose power every thunderstorm; a two-drawer locking file cabinet; a real desk calculator with a paper tape; a paper shredder for client documents; a wall calendar; a coffee maker. The coffee maker is not deductible. I've asked.

6. Keeping the Kids Out of the Office
I have two, ages nine and thirteen, and the rules that work in our house are these:
  • The door is the signal. Door closed means Mom is at work, same as if she'd driven there. Door open means come on in. The kids understood this faster than my husband did.
  • Nothing in the office is theirs. Not the computer, not the stapler, not the good pens. They have their own computer in the family room for homework and games. The office computer has client data on it and it is not where anyone plays anything.
  • Office hours are posted. On the door, on paper. If a client calls during those hours, I answer with the business name. Outside those hours, I try very hard not to be in there, which is as much for me as for them.
  • Emergencies are defined. Blood, fire, someone at the door. A fight over the remote control is not an emergency. We reviewed this.
  • The lock exists for phone calls. I don't use it often. But a client cannot hear a nine-year-old yelling "MOM, where is my other shoe" through a locked door with a towel along the bottom. I learned about the towel from a radio program.
Summer is the hard part. If you can, line up a sitter or a camp for the mornings and do your phone work then. Afternoons, do the quiet work that survives interruptions.

7. Working Alone Without Going Strange
Nobody warns you about this. Around month three of working at home you realize you haven't spoken to an adult who isn't a client or your spouse in a week, you're wearing the same sweatpants as yesterday, and you're talking to the cat. What helps:
  • Get dressed. Real clothes, shoes. It sounds silly. It works.
  • Leave the house once a day on purpose. Post office, bank, a walk around the block.
  • Have a standing lunch with another self-employed person. Mine is Thursdays with a graphic designer who works from her basement. We trade referrals and complaints.
  • Join something. The chamber of commerce, a home-business group, a professional association. Even the meetings you dread are good for you.
  • Set a quitting time and keep it. The office is twenty feet from the bed, and "I'll just check one thing" at 10 p.m. becomes midnight. The work will be there tomorrow.
  • The Internet counts a little, but not a lot. E-mail is not a conversation. Get out of the house.

8. A Y2K Note for Small Business Software New!
Three months to go. I don't think the lights are going out, but I have seen a copy of an accounting program from 1993 that will sort every invoice dated 01/05/00 in front of every invoice from 1999, and that is the kind of Y2K problem a small business actually gets. So, this fall:
  1. Check your software. Every major vendor has a Y2K statement for each version. Look up the version you actually have (Help, then About). Older versions of accounting, payroll and contact-management software are the usual trouble spots. If your version isn't listed as compliant, upgrade before December, not after.
  2. Check the computer itself. There's a simple test: back up first, then set the date to December 31, 1999, 11:58 p.m., shut down, wait a few minutes, start it up and see what date it thinks it is. Most machines from the last couple of years are fine. Some older ones need a BIOS update or just need the date set once by hand on January 1.
  3. Look at your own spreadsheets. Any formula you wrote that uses two-digit years is your problem, not the vendor's. Use four-digit years from now on.
  4. Back everything up in late December and print your key reports: customer list, open invoices, bank balances, the general ledger. If something goes wrong, you'll be glad to have paper.
  5. Ask your bank and your payroll service what they've done. They've been working on this for years and will be happy to tell you.
Then relax. The first week of January, look at a few dates in your reports and make sure they sort right. That's most of it.

Where to go next

E-mail Diane Questions or a tip I missed? [email protected]
I answer general questions here for free. Detailed help with your own business is what I do for a living, and I'll say so if we get there.

You are visitor number 022307 since January 1999

Last updated September 22, 1999 (added the Y2K section and the 1999 deduction change). © 1998-1999 Diane C. General information only, not tax or legal advice.

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