Posted by The TaxAdvocate Group, LLC

Small Office Home Office (SOHO)

Small Office Home Office (SOHO)

Small Office Home Office (SOHO), a term used to distinguish between small, medium, and large businesses. Technically, SOHO companies have between zero and ten employees, although many of them are individual stores. 

Many small home offices are home businesses, hence the "home office" in the small home office. In the United States, the percentage of home-based businesses has remained relatively constant over the past decade, at around 50% of all businesses. Specifically, 60.1% of all businesses with unpaid employees are home-based and 23.3% of small businesses, and 0.3% of large businesses.

According to the United States Small Business Administration, small businesses in these industries are more likely to be home-based:

  • Construction (68.2%): People working under contract in civil construction, such as plumbers, electricians, carpenters, earners, masons, etc., who can transport most of the trade tools with trucks or vans and have no need of an office.

  • Information (70.0%): Typical examples of SOHO include writers, web designers/graphic designers, software developers, systems analysts, etc., who can work remotely over the Internet.

  • Professional, scientific, and technical services (65.3%): Examples of SOHO include consultants/specialists in various fields, including accountants, lawyers, engineers, etc.

But the term SOHO has a broader scope; it Includes all those who work in a small office, whether as an employer or as an employee. It is estimated that since 2017, more than 3.7 million employees in the United States have worked from home at least half the time, representing 2.8% of the total American workforce. And the number of routine teleworkers has grown by over 100% since 2005 and continues to grow in popularity rapidly.

Whether or not these small businesses refer to SOHO or not, marketers certainly do. Small home offices' emergence has led to a corresponding increase in products and services created specifically for the SOHO market, such as multifunction printers and home offices.

The offshoot of small office home office

SOHO companies have thrived with the advent of technologies such as cloud computing and mobile devices that allow home workers to access corporate information from the Internet from anywhere, which has led to more and more virtual companies (companies without physical structures).

Many professionals, including accountants, lawyers, financial advisors, and travel agents, now run SOHO companies. The consulting business's growth over the past decades has also led to an increase in the SOHO business. New types of businesses have been created entirely based on the Small Office Home Office model, such as virtual assistants.

The number of small home offices is expected to grow steadily as more businesses embrace telecommuting; 50% of the US workforce has jobs that provide partial telecommuting assistance. About 20-25% of the workforce frequently telecommutes, according to 

Co-working is another branch of the growing number of SOHO companies. Not only can this be cheaper than owning your own office space, but it can also give freelancers more opportunities to network and share ideas than they would have in an individual office space.

Why do people run SOHO?

According to statistics, the main purpose why people want to work from home or small office is because of their lifestyle:

  • Be your boss: working from home gives you some independence, even if you are an employee. If you want to be up-to-date with social media during the workday, you can do so without feeling someone looking behind you.

  • Better health and well-being: Those who work in a small office or at home have a better work-life balance and are often happier and more productive than those who work all day in an office company. Reducing stress, increasing flexibility, and spending more time with family, friends, and exercise contribute to a healthier lifestyle.

  • Comfort: working from home is much more comfortable than working in a corporate office. If you decide to get up and work in your bathrobe or pajamas all morning, you can. If you decide to listen to music, you can do so without interrupting anyone. Whether at home or in the private office, you are free to configure your office environment exactly the way you want, instead of meeting corporate standards for everything from office furniture to the generic coffee brands used in the coffee shop office. The choice of desk, computer, monitor, and other office equipment can be up to you.

  • Less Distraction and Less Stress: Working in a crowded office can be very demanding, especially since large companies have long since ditched the concept of single offices for employees and embraced the concept of a 'cubicle farm", which reduced workspace, lack of natural light, and lack of privacy are confusing and depressing for many people. 

  • Less travel: People who run SOHO companies typically don't have to spend hours commuting to work every day. In addition to not wasting time in traffic, you save on the car or public transport, as well as a reduction in chemical cleaning, childcare, etc. The environment's effect is also reduced (working from home is a great way to make the world greener).

  • More time with family: Working at home or in a small office allows people to spend more time with family, pets, and friends. A home office arrangement is particularly beneficial for stay home moms, provided the work schedule is flexible.

However, running your business as SOHO can also result in significant cost savings.

How to determine your home office deduction

You can determine the values of the deduction with the simplified or regular option.

  • With the simplified option, the actual expenses are not deducted. Instead, the square area of your space is multiplied by a preset rate. The rate is $ 5 per square foot for up to 300 square feet of space.

  • The most difficult method is to assess your home office by measuring actual maintenance costs. Interest can be deducted from mortgages, taxes, maintenance and repairs, insurance, utilities, and other expenses.


How to calculate your home office deduction

Your home office deductions are calculated based on the percentage of accommodation used for business or a simplified calculation of square footage.

Business percentage of house method:

The most accurate way to calculate this ratio is to measure your home office's square footage and determine your total home area percentage.

  • A simpler way is acceptable if the rooms in your house are all the same size. In this case, you can calculate the business rate by dividing the total rooms used for your business by the total rooms in the house.

  • If your office is 150 square meters, for example, and your total house area is 1,200 square meters, your business percentage would be 12.5% (150 square meters ÷ 1200 square meters = 0.125 (12.5%)

A simplified method of square footage

Since the 2013 tax return, the IRS has started offering a simplified option to claim the deduction. This method uses a designated rate multiplied by the authorized square footage used in the home.

  • For 2020, the prescribed rate is $ 5 per square foot, with a maximum of 300 square meters.

  • If the office is 150 square meters, the deduction will be $ 750 ($150 x $5).

  • Space should continue to be dedicated to the business activity described above.

Note: Regardless of the method, eligibility for the home office deduction is determined annually. Therefore, you can qualify in one year and not the next year, or vice versa.



The TaxAdvocate Group, LLC
Contact Member