LEGALITIES OF A HOME BASED BUSINESS
Every year, several thousand people develop an interest in
"going into business." Many of these people have an idea, a
product or a service they hope to promote into an income
producing business which they can operate from their own homes.
If you are one of these people, here are some practical
thoughts to consider before hanging out the "Open-for-Business"
sign.
In areas zoned "Residential Only," your proposed business
could be illegal. In many areas, zoning restrictions rule out
home businesses involving the coming and going of many customers,
clients or employees. Many businesses that sell or even store any
thing for sale on the premises also fall into this category.
Be sure to check with your local zoning office to see how
the
ordinances in your particular area may affect your business plans.
You may need a special permit to operate your business from your
home; and you may find that making small changes in your plan will
put you into the position of meeting zoning standards.
Many communities grant home occupation permits for businesses
that involve typing, sewing and teaching, but turn thumbs down on
requests from photographers, interior decorators and home-improve-
ment businesses to be run from the home. And often, even if you
are permitted to use your home for a given business, there will be
restrictions that you may need to take into consideration. By all
means, work with your zoning people, and save yourself time,
trouble and dollars.
One of the requirements imposed might be off-street parking
for your customers or patrons. And, signs are generally forbidden
in residential districts. If you teach, there is almost always a
limit on the number of students you may have at any one time.
Obtaining zoning approval for your business, then, could be
as
simple as filling out an application, or it could involve a public
hearing. The important points the zoning officials will consider
will center around how your business will affect the neighborhood.
Will it increase the traffic noticeably on your street? Will
there be a substantial in crease in noise? And how will your
neighbors feel about this business alongside their homes?
To repeat, check into the zoning restrictions, and then check
again to determine if you will need a city license. If you're
selling something, you may need a vendor's license, and be
required to collect sales taxes on your transactions. The sales
tax requirement would result in the need for careful record
keeping.
Licensing can be an involved process, and depending upon the
type of business, it could even involve the inspection of your
home to determine if it meets with local health and building and
fire codes. Should this be the case, you will need to bring your
facilities up to the local standards. Usually this will involve
some simple repairs or adjustments that you can either do
personally, or hire out to a handyman at a nominal cost.
Still more items to consider: Will your homeowner's
insurance
cover the property and liability involved in your new business?
This must definitely be resolved, so be sure to talk it over with
your insurance agent.
Tax deductions, which were once one of the beauties of
engaging in a home business, are not what they once were. To be
eligible for business related deductions today, you must use that
part of your home claimed exclusively and regularly as either the
principal location of your business, or the place reserved to meet
patients, clients or customers. NOTE: recent tax law changes have
liberalized this potential benefit. However, the changes do not
take effect until 2000.
An interesting case in point: If you use your den or a spare
bedroom as the principal place of business, working there from
8:00 to 5:00 every day, but permit your children to watch TV in
that room during the evening hours, the IRS dictates that you
cannot claim a deduction for that room as your office or place of
business.
There are, however, a couple of exceptions we will note to the
"exclusive use" rule. One is the storage of inventory in your
home, where your home is the location of your trade or business,
and approval for your business, then, could be as your trade or
business is the selling of products at retail or wholesale.
According to the IRS, such storage space must be used on a regular
basis, and be a separately identifiable space.
Another exception applies to day care services that are
provided for children, the elderly, or physically or mentally
handicapped. This exception applies only if the owner of the
facility complies with the state laws for licensing.
To be eligible for business deductions, your business must be
an activity undertaken with the intent of making a profit. It's
presumed you meet this requirement if your business makes a profit
in any two years of a five-year period.
Once you are this far along, you can deduct business expenses
such as supplies, subscriptions to professional journals, and an
allowance for the business use of your car or truck. You can also
claim deductions for home related business expenses such as
utilities, and in some cases, even a new paint job for your home.
The IRS is going to treat the part of your home you use
for
business as though it was a separate piece of property. This
means that you'll have to keep good records and take care not to
mix business and personal matters. No specific method of record
keeping is required, but your records must clearly justify any
deductions you claim.
You can begin by calculating what percentage of the house is
used for business, either by number of rooms or by area in square
footage. Thus, if you use one of five rooms for your business,
the business portion is 20 percent. If you run your business out
of a room that's 10 by 12 feet, and the total area of your home is
1,200 square feet, the business-space factor is 10 percent.
An extra computation is required if your business is a home
day care center. This is one of the exempted activities in which
the exclusive use rule doesn't apply. Check with your tax
preparer and the IRS for an exact determination.
If you're a renter, you can deduct the part of your rent which
is attributable to the business share of your house or apartment.
Homeowners can take a deduction based on the depreciation of the
business portion of their house.
There is a limit to the amount you can deduct. This is the
amount equal to the gross income generated by the business, minus
those home expenses you could deduct even if you weren't operating
a business from your home. As an example, real estate taxes and
mortgage interest are deductible regardless of any business
activity in your home, so you must subtract from your business'
gross income the percentage that's allocable to the business
portion of your home. You thus arrive at the maximum amount for
home-related business deductions.
If you are self-employed, you claim your business deductions
on Schedule C, Profit (or Loss) for Business or Profession. The
IRS emphasizes that claiming business-at-home deductions does not
automatically trigger an audit of your tax return. Even so, it is
always wise to keep meticulously within the proper guidelines, and
of course keep detailed records if you claim business related
expenses when you are working out of your home. You should
discuss this aspect of your operation with your tax preparer or a
person qualified in the field of small business tax requirements.
If your business earnings aren't subject to withholding tax,
and your estimated federal taxes are $100 or more, you'll probably
be filing a Declaration of Estimated Tax, Form 1040-ES. To
complete this form, you will have to estimate your income for the
coming year and also make a computation of the income tax and
self-employment tax you will owe. The self-employment taxes pay
for Social Security coverage.
If you have a salaried job covered by Social Security, the
self-employment tax applies only to the amount of your home
business income that, when added to your salary, reaches the
current ceiling. When you file your Form 1040-ES, which is due
April 15, you must make the first of four equal installment
payments on your estimated tax bill.
Another good way to trim your taxes is by setting up a Keogh
plan or an Individual Retirement Account. With either of these,
you can shelter some of your home business income from taxes by
investing it for your retirement.
Edited & Distributed by the Staff of Computer Expertise Ltd.