Every year, thousands of people develop an interest in starting their own
    business. Many of these have an idea, product, or service they hope to develop
    into an income producing business that can be operated from their own homes. If
    you are one of these people, here is some practical advice to consider before
    hanging out your "Open for Business" sign.

    Consider your city's zoning laws. Working from your home in an area zoned
    "Residential Only" could place your business contrary to zoning restrictions.
    Some cities rule out home businesses involving the coming and going of more
    than a handful of customers, clients, or employees. Many businesses that sell or
    store any item for sale on the premises also fall into this category. Be sure to
    check with your local zoning office to find out how the ordinances in your area may
    affect your business plans. You may need a special permit to operate your
    business from your home. You could find that making small changes in your plan
    will help you meet zoning standards.

    Obtaining zoning approval for your business can be as simple as filling out an
    application, or it could involve a public hearing. Zoning officials will primarily
    consider how your business will affect the neighborhood. Will it noticeably
    increase the traffic on your street? Will there be a substantial increase in noise?
    How will your neighbors feel with your business opening near their homes? Will
    property values be affected, thereby decreasing tax revenue?

    Many communities grant home occupation permits for businesses that involve
    typing, sewing, and teaching, but deny exemptions to photographers, interior
    decorators, and home-improvement operations seeking a zoning abatement to
    run their businesses from home. 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. You must work closely with your city or county zoning
    commission in order to save yourself time, trouble, and dollars.

    Occasionally permission will be granted for a home business to operate
    providing specific conditions are met. Such requirements might include the
    providing of off-street parking for your customers, or a prohibition against
    posting signs in your residential area. If you plan to begin a child care, home
    school, or tutoring service, there is generally a limit on the number of students you
    may have at any one time. Child care services, catering, or operations involving
    food handling or preparation often require health permits from the city or county
    Health Department.

    If you are selling something from your home, you may need a vendor's license.
    You will also be required to collect sales tax on sales made within your state.
    Collection of taxes will require careful record keeping on your part. Check with
    your state comptroller's office for more information.

    If your business requires any licenses, you will have to file one or more forms with
    the agencies under whose jurisdiction you fall. Licensing can be a simple
    process, or depending upon the type of business, it may involve the inspection of
    your home to determine if it meets local health, building, and fire codes. Should
    this be the case, you will need to insure that your facilities meet the local
    standards. This could involve some simple repairs or adjustments that you can
    either do personally or hire out to a handyman at a nominal cost.

    Insurance costs must be figured into the operating expenses of your business.
    Will your homeowner's insurance cover the property and liability involved in your
    new business? If a customer injures himself while on your property, will you have
    enough insurance to cover any claims against you? This must be determined
    before you begin operation, so be sure to talk it over with your insurance agent.

    Tax deductions, once one of the advantages of engaging in a home business, are
    not as attractive as they once were. To be eligible for business related
    deductions today, the Internal Revenue Service requires that you use the part of
    your home claimed as a deduction "exclusively and regularly" as either the
    principal location of your business or the place reserved to meet patients, clients,
    or customers. Thus, if you work out of the corner of the den, but the family also
    uses the room for watching television, you cannot deduct the space as a business
    expense. Your personal telephone, if used for anything other than business calls,
    is not a legitimate deduction. Carefully review the tax laws before filing for any
    home business deductions.

    There are a couple of exceptions to note within the "exclusive use" tax rule. One is
    the storage of inventory in your home. If you use your home as headquarters for a
    trade or business in which you sell retail or wholesale products, the IRS declares
    that storage space can be deducted if the storage space is used on a regular
    basis and is a separately identifiable space. If this condition is met, you may
    legitimately deduct use of the area.

    The deductible use of your home as a daycare facility providing care for children,
    the elderly, or the physically or mentally disabled must also meet several
    requirements. While not restricted by "exclusive use" regulations, use of the home
    can only be considered deductible if you comply with all state laws and
    regulations for the licensing of such institutions. Because these standards are
    numerous, strict, and often difficult to meet in a typical residential home, you
    probably will not be able to claim this deduction.

    In general, to be eligible for business deductions you must be engaged in an
    activity with the intent of making a profit. It's presumed you meet this requirement
    if your business shows 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 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 square footage. Thus, if you
    use one of 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 daycare facility. Check with
    your tax preparer and the IRS for an exact determination. If you're a renter, you
    can deduct the portion 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 of business expense you can deduct from your
    federal income tax. This is equal to the amount of gross income generated by the
    business minus those home expenses you could deduct even if you weren't
    operating a business. For 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 allowable 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 will claim your business deductions on Schedule C,
    Profit (or Loss) for Business or Profession in your annual income tax return. The
    IRS emphasizes that claiming home business 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 maintain detailed records if you claim business
    related expense. You should discuss this aspect of your operation with your tax
    preparer or with a person qualified in the field of small business taxes.

    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. 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 the amount of your home business income
    that when added to your salary reaches the current ceiling. When filing this form,
    you must make the first of four equal installment payments on your estimated tax

    The total amount of your taxes due can also be decreased if you contribute to a
    Keogh or an Individual Retirement Account (IRA ). A husband and wife can
    deduct up to $2000 each from their total gross income if the amount is deposited
    into such a retirement account. The money will continue to accrue with interest tax
    deferred until it is withdrawn. Check with your bank, accountant, or broker for
    further details.

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Comment by Reynold Jay: This is an excellent article and should not scare you with all it's talk of the IRS rules. Simply work with a good bookkkeeper or accountant at tax time who will see that you get the home-based deductions you are entitled to. He'll set up your business and make recommendations for the payment of taxes and retirement accounts. The "profit in two years of
five" rule may not be current.

If you sell on the internet and no one is entering your home or apartment to purchase items, because you mail out everything, chances are excellent that you will need no blessing from your local govenment. Make the phone call to find out," No problem if you mail out everything." Do not
advertise in the yellow pages of your phone book. Do obtain a business license, as you'll need it for banking, charge cards, etc.You won't need slip and fall insurance, or home business insurance.The money you'll save by not worrying about the "locals" is more than any profit they might bring in. Keep a tight lid on your business activities with your neighbors or you might wake up one morning and find your house broken into and your inventory missing!