Legalities & Tax Advantages In A Home Business

Every year, several thousand people develop an interest in "goinginto business." Many of these people have an idea, a product or aservice they hope to promote into an income producing businesswhich they can operate from their homes.
If you are one of these people, here are some practical thoughtsto consider before hanging out the "Open for Business" sign.
In areas zoned "Residential Only," your proposed business couldbe illegal. In many areas, zoning restrictions rule out homebusinesses involving the coming and going of many customers,clients or employees. Many businesses that sell or even storeanything for sale on the premises also fall into this category.
Be sure to check with your local zoning office to see how theordinances in your particular area may affect your businessplans. You may need a special permit to operate your businessfrom your home; and you may find that making small changes inyour plan will put you into the position of meeting zoningstandards.
Many communities grant home occupation permits for businessesinvolve typing, sewing, and teaching, but turn thumbs down onrequests from photographers, interior decorators and homeimprovement businesses to be run from the home. And often, evenif you are permitted to use your home for a given business, therewill be restrictions that you may need to take intoconsideration. By all means, work with your zoning people, andsave yourself time, trouble and dollars.
One of the requirements imposed might be off street parking foryour customers or patrons. And, signs are generally forbidden inresidential districts. If you teach, there is almost always alimit on the number of students you may have at any one time.
Obtaining zoning approval for your business, then, could be assimple as filling out an application, or it could involve apublic hearing. The important points the zoning officials willconsider will center around how your business will affect theneighborhood. Will it increase the traffic noticeably on yourstreet? Will there be a substantial increase in noise? And howwill your neighbors feel about this business alongside theirhomes?
To repeat, check into the zoning restrictions, and then checkagain to determine if you will need a city license. If you'reselling something, you may need a vendor's license, and berequired to collect sales taxes on your transactions. The saletax requirement would result in the need for careful recordkeeping.
Licensing can be an involved process, and depending upon the typeof business, it could even involve the inspection of your home todetermine if it meets with local health and building and firecodes. Should this be the case, you will need to bring yourfacilities up to the local standards. Usually this will involvesome simple repairs or adjustments that you can either dopersonally, or hire out to a handyman at a nominal cost.
Still more items to consider: Will your homeowner's insurancecover the property and liability in your new business? This mustdefinitely be resolved, so be sure to talk it over with yourinsurance agent.
Tax deductions, which were once one of the beauties of engagingin a home business, are not what they once were. To be eligiblefor business related deductions today, you must use that part ofyour home claimed EXCLUSIVELY AND REGULARLY as either theprincipal location of your business, or place reserved to meetpatients, clients or customers.
An interesting case in point: if you use your den or a sparebedroom as the principal place of business, working there from8:00 to 5:00 every day, but permit your children to watch TV inthat room during evening hours, the IRS dictates that you cannotclaim a deduction for that room as your office or place ofbusiness.
There are, however, a couple of exceptions to the "exclusive use"rule. One is the storage on inventory in your home, where yourhome is the location of your trade or business, and your trade orbusiness is the selling of products at retail or wholesale.According to the IRS, such storage space must be used on aREGULAR Basis, and be separately identifiable space.
Another exception applies to daycare services that are providedfor children, the elderly, or physically or mentally handicapped.This exception applies only if the owner of the facility complieswith the state laws for licensing.
To be eligible for business deductions, your business must be anactivity undertaken with the intent of making profit. It'spresumed you meet this requirement if your business makes aprofit in any two years of a five-year period.
Once you are this far along, you can deduct business expensessuch as supplies, subscriptions to professional journals, and anallowance for the business use of your car or truck. You can alsoclaim deductions for home related business expenses such asutilities, 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 forbusiness as though it were a separate piece of property. Thismeans that you'll have to keep good records and take care not tomix business and personal matters. No specific method of recordkeeping is required, but your records must clearly justify anddeductions you claim.
You can begin by calculating what percentage of the house is usedfor business, Either by number of rooms or by area in squarefootage. Thus, if you use one of the five rooms for yourbusiness, the business portion is 20 percent. If you run yourbusiness out of a room that's 10 by 12 feet, and the total areaof your home is 1,200 square feet, the business space factor is10 percent.
An extra computation is required if your business is a home daycare center. This is one of the exempted activities in which theexclusive use rule doesn't apply. Check with your tax preparerand the IRS for an exact determination.
If you're a renter, you can deduct the part of your rent which isattributable to the business share of your house or apartment.Homeowners can take a deduction based on the depreciation of thebusiness portion of their house.
There is a limit to the amount you can deduct. This is the amountequal to the gross income generated by the business, minus thosehome expenses you could deduct even if you weren't operating abusiness from your home. As an example, real estate taxes andmortgage interest are deductible regardless of any businessactivity in your home, so you must subtract from your businessgross income the percentage that's allocable to the businessportion of your home. You thus arrive at the maximum amount forhome-related business deductions.
If you are self-employed, you claim your business deductions onSCHEDULE C, PROFIT(or LOSS) for BUSINESS OR PROFESSION. The IRSemphasizes that claiming business-at-home deductions does notautomatically trigger an audit on your tax return. Even so, it isalways wise to keep meticulously within the proper guidelines,and of course keep detailed records if you claim business relatedexpenses when you are working out of your home. You shoulddiscuss this aspect of your operation with your tax preparer or aperson qualified in the field of small business tax requirements.
If your business earnings aren't subject to withholding tax, andyour estimated federal taxes are $100 or more, you'll probably befiling a Declaration of Estimated Tax, Form 1040 ES. To completethis form, you will have to estimate your income for the comingyear and also make a computation of the income tax andself-employed tax you will owe.
The self-employment taxes pay for Social Security coverage.If you have a salaried job covered by Social Security, theself-employment tax applies only to that amount of your homebusiness income that, when added to your salary, reaches thecurrent ceiling. When you file your Form 1040-ES, which is dueApril 15, you must make the first of four equal installmentpayments on your estimated tax bill.
Another good way to trim taxes is by setting up a Keogh plan oran Individual Retirement Account. With either of these, you canshelter some of your home business income from taxes by investingit for your retirement.