LEGALITIES & TAX ADVANTAGES
IN A HOME 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 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 b fore 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-improvement 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. |
RoDI
ISOC
IWA
ARTT
RTS
WQC 2003 
ISAQ 2005