LEGALITIES & TAX ADVANTAGES

IN A HOME BUSINESS

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 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

anything 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

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 increase 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 sale

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 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 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 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 to the "exclusive use"

rule. One is the storage on inventory in your home, where your

home is the location of your trade or business, and 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 separately identifiable space.

Another exception applies to daycare 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 undertaken with the intent of making 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 and

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 the five rooms for your

business, the business portion is 20 percent. If you run your

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 on 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-employed 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 that 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 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.