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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 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 anything 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 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 increase 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 sale 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 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 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 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 to the "exclusive use" rule. One
is the storage on inventory in your home, where your home is the location of
your trade or business, and 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 separately identifiable space.
Another exception applies to daycare 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 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 and 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 the 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 on 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-employed 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 that 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 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.
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