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Every year, hundreds of thousands of people develop an interest in “going into
their own business.” Many of these people have a unique idea, product or service
they hope to promote into an income production business with which they can
operate from their own homes.
If you are one of the aforementioned people, here are some practical thoughts to
consider before putting up the “Open for Business” sign…
In areas zoned as “Residential Only,” your proposed business could be illegal.
In many areas, zoning restrictions rule out the legality of a home business.
Many businesses that sell or even store anything for sale on the premises
(whether offline or online) also fall into this category.
Be very careful about this issue and check with your local zoning office to see
how the ordinances in your particular area may affect your business operations.
You may need a special permit to operate your business from your home; also you
may find that making small changes in your plans 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 down requests from photographers, interior
decorators and home improvement businesses to be run for a 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
and communicate with your local zoning officials, and you will find yourself
saving time and money.
One of the requirements imposed might be off-street parking for your customers
or patrons. Signs advertising your business are almost always forbidden in
residential districts. If you teach, there is almost always a limit to the
number of students that you may have at any one given 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
that the zoning officials will consider center around how your business will
affect the neighborhood. Will your business increase the amount of traffic on
your street? Will there be a substantial increase in noise created by your
business? How will your neighbors react to you business alongside their homes?
To review, check into zoning restrictions, and then check again to determine if
you will need a city license for your type of business. If you’re selling
something, you may need a vendor’s license, and be required to collect sales
taxes on all your transactions. The sales tax requirement would result in the
need for careful record keeping of all sales.
Licensing can be a tedious process and depending on the type of business, it
could even involve the inspection of your home to determine if it is in
accordance with local health and building/fire codes. Should this be the case,
you will need to bring your facilities up to the local standards. Usually this
may involve some simple repairs or adjustments that you can either do personally
or hire out to a handyman at a nominal cost. More issues to consider: Will
your homeowner’s insurance cover the property liability involved in your new
business? This must definitely be resolved so be sure to look into this issue
with your insurance agent.
Tax deductions, which were once one of the beauties of engaging in a home
business, are not what they used to be. 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 and customers.
An interesting case: If you use your den or spare bedroom as the principal
location of your business, working there from 8:00 am to 5:00 pm 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 particular room as your
place of business.
An exception applies to day care services that are provided for children, the
elderly, or physically or mentally impaired. 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 that you meet this
requirement if your business makes a profit in any two years of a five-year
period.
Once you are up to this point, you can start deduction business expenses such as
supplies, subscriptions to pro journals, and an allowance for the business use
of your car or truck. You may 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 & 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 that you claim.
You may 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 10 feet, and the total square feet of
your home is 1000 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 specialist and the IRS for an exact determination.
If you’re a renter, you can deduct the part of your rent that 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 the 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. For example,
real estate taxes and mortgage interest are deductible regardless of any
business activity originating from your home; therefore, you must subtract from
your business’ gross income, the percentage that’s allocable to the business
portion of your home. You then 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 meticulous records 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 operations with your tax advisor or a person qualified in the field of
small business tax requirement.
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 regular salary 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 on 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. |
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