Tuesday, 17 September 2013

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.

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