Tax Advantages In
A Home Business
by Joe Featherston
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 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-improve ment 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.
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