The Impact of Location on Net Income: A Comparison of 

Homebased and Non-homebased Sole Proprietors

Joanne H. Pratt Associates, Dallas, TX 75219

2006. [55] pages. Under contract SBAHQ-04-Q0-0023

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information 

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy.

Using 2002 sole proprietorship data, the impact of 

location on net income was analyzed using a sample 

of 1.6 million profitable nonfarm sole proprietorships 

that took a home office business deduction (homebased businesses) and 1.9 million that deducted rent 

for other business property (non-homebased businesses). Homebased (584,000) and non-homebased 

(770,000) firms reporting a deficit were compared 

with profitable businesses. 

Overall Findings

In 2002, homebased businesses (HBB) earn lower 

average receipts ($62,523) and net income ($22,569) 

than businesses operated in rented space (non-HBB) 

($178,194 and $38,243, respectively). Homebased 

firms gain a higher return on gross revenues compared with non-HBBs (36 percent versus 21 percent).

Highlights

• Homebased businesses earn 35 percent of the 

receipts earned by non-homebased businesses, take 

29 percent of their total deductions and have a net 

income of 59 percent of non-HBBs. HBBs spend 12 

percent of non-HBBs’ cost of labor and 26 percent 

for business location. 

• Cost of labor is greater for firms earning a profit (12 percent versus 5 percent of total deductions).

The allocation to cost of business location is roughly 

equivalent (26 percent versus 28 percent) for both 

profitable firms and those reporting a loss. 

• Homebased business owners were found to 

work fewer hours per week and days per year, and 

25 percent of HBB owners rely on their business for 

their total income compared with 33 percent of nonHBB owners.

• Homebased sole proprietors who take the home 

business deduction contribute a total of $102 billion in revenue to the economy. The 10 million “all 

other” firms, which appear to be largely homebased, 

contribute an additional $431 billion.

Data Sources

In this study the authors used federal income tax data 

from year 2002 sole proprietorship returns (Schedule 

C). The 2002 dataset is based on a sample of 49,752 

returns and a population of 18,925,517 returns (13.8 

million reporting net income; 5.2 million reporting 

a deficit) accounting for 21,020,333 non-farm businesses. Because persons who deduct home office 

expenses must file a Schedule C (that is, they cannot 

file the shorter Schedule C-EZ) the cross-tabulation 

tables are based on representative samples of nonfarm homebased business owners who deduct home 

office expenses and non-homebased business owners 

who deduct “rent on other business property.” The 

sample does not contain those “all other” firms that 

opt not to take the home office deduction nor those 

that deduct for both a home office and rent, so in that 

respect it is not representative of all homebased businesses.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the director of economic research by email at 

advocacy@sba.gov or by phone at (202) 205-6533.

May 2006 No. 275
Ordering Information 

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration's Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2006-108487

To receive email notices of new Advocacy 

research, press releases, regulatory communications, 

and publications, including the latest issue of The 

Small Business Advocate newsletter, visit http://web.

sba.gov/list and subscribe to the appropriate Listserv.
 

 

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains

information and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final 

conclusions of the report do not necessarily reflect the views of the Office of Advocacy.