Tax Advantages In A Home Business
Copyright 2004 Joe
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
If you are one of these people, here are some practical
thoughts to consider before hanging out the
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
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
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
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
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
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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