Starting a Business in Your Home

Tax and Legal Issues to Consider Before Starting a Home Business

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For many new businesses, running the business in your home seems to be a great money-saver and a convenience. A home-based business is easy to start and to run and you can keep your business expenses low by running out of your home. Here are some issues that are unique to home businesses. You'll need to consider these questions as you set up your home-based business:

Do I need to get a zoning waiver?  

Check with your city or town to see what their zoning regulations and city ordinances are.

You have a better chance of getting approval if you aren't going to have customers coming to your home, but a limited number of customers might be possible. It really depends on the individual city and their regulations. In some cases, the neighbors will have to approve the business.

Will I be able to get financing? 

You may be surprised to find that banks and other lenders are reluctant to lend money to home-based businesses. They may feel that you are not "serious" about your business. Preparing an excellent business plan and presenting the business as a long-term profitable endeavor will help you convince a bank to lend you money.

What compliance and regulatory issues must I consider? 

Home-based businesses are not exempt from compliance issues. In particular, the provisions of the Americans with Disabilities Act (ADA) require you to make your business accessible to the public and include an appropriate number of parking spaces.

If you have customers coming to your home and you are making substantial improvements to your home for your new business, you may find that these accommodations are too costly.

If you have employees working in your home, you may need to deal with OSHA (worker safety) requirements, just like other businesses.

That might put the cost of setting up the business higher than yo anticipated. 

Can I deduct travel from my home business?

Commuting expenses are never deductible, but you can deduct travel expenses for your home based business in the same way as other businesses. You must be able to show business purpose and have good records to back up the deduction.

Can I deduct home business expenses?

Deducting normal business operating expenses. While having a home-based business is convenient and low-cost, you should consider whether you can deduct the costs for running your business from home. Most of the time, it doesn't matter what the costs are; if they are legitimate business expenses, you can deduct them. Just be sure to keep your business and personal expenses separate and make sure you have good records to prove these costs were for the business. 

Deducting the cost of your home business space. The cost of your business space is also a legitimate business expense, but the IRS looks at this cost more carefully. The space you use must be used BOTH regularly AND exclusively for business purposes. If this is the case, you can deduct a portion of your home expenses, like utilities, mortgage interest, rent, or improvements, as a business expense.

To figure the deduction, you will need to calculate the space as a percentage of your home. Next, itemize direct expenses and those related to your home. If you have a very small space, you may be able to use the new (since 2013 taxes) simplified deduction method. Otherwise, you'll need to complete Form 8829 to capture the deduction.

To avoid issues with the IRS, review this article which lists common mistakes home business owners make, like using a home business space for personal items or activities, and not keeping business and personal expenses separate.

Read more about your home business and taxes.