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 in come 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 t o 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.
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 sour 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 under taken 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 were 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 you r
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.
