Legalities & Tax Advantages In A Home Business

Legalities & Tax Advantages In A Home Business



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 ​ youre
selling something,​ you​ may need a​ vendors 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 homeowners 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
800 to​ 500 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. ​
Its
presumed you​ meet this requirement if ​ your business makes a
profit in​ any two years of​ a​ fiveyear 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 youll 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 thats 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 doesnt apply. ​
Check with your tax preparer
and the​ IRS for an exact determination.
If youre 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​ werent 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 thats allocable to​ the​ business
portion of​ your home. ​
You thus arrive at ​ the​ maximum amount for
homerelated business deductions.
If you​ are selfemployed,​ you​ claim your business deductions on
SCHEDULE C,​ PROFITor LOSS for BUSINESS or​ PROFESSION. ​
The IRS
emphasizes that claiming businessathome 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 arent subject to​ withholding tax,​ and
your estimated federal taxes are $100 or​ more,​ youll 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
selfemployed tax you​ will owe.
The selfemployment taxes pay for Social Security coverage.
If you​ have a​ salaried job covered by Social Security,​ the
selfemployment 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 1040ES,​ 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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