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Legalities & Tax
Advantages In A Home
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-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 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
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 based on - 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
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
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
About the Author:
Gazaway, webmaster and owner of
http://www.homebasedbusinessindex.com and publisher of the "HBBI
Newsletter". To subscribe to this free home business newsletter,
simply visit his site listed above or send a blank email to:
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