Home-based Businesses Can Have Pitfalls
Joyce M. Rosenberg AP Business Writer
July 21, 2009NEW YORK (AP) - For many of the people laid off during the recession, the next career move is a home-based business. It's an ideal solution for many, but these new entrepreneurs need to be aware of some caveats in running a company from home.
One is taxes. It's much easier to claim a deduction for a home-based business than it was years ago, when it almost guaranteed a visit from the IRS. But it's still possible to make a mistake, claim too big a deduction, and grab the government's attention. Another pitfall to look out for is insurance. Chances are you'll need to buy additional insurance if you're operating out of your house or apartment.
And, you need to be sure running a business in your home doesn't violate any local laws or regulations, or, if you're part of a homeowners' association or co-op, its bylaws.
You should take taxes into consideration as you decide where in your home you're going to operate a business. Mark Toolan, a certified public accountant in Exton, Pa., noted that the space you choose ``must be exclusively used for business.''
That means you can't claim your entire family room if the kids watch TV and play there too. You might be able to claim the part of the room with your desk and PC, but keep in mind you might need to prove to the IRS that your kids don't sit there for hours at a time playing computer games or visiting Facebook.
Claiming part of your home for business use means you can deduct the part of the mortgage or rent, insurance, maintenance costs and repairs that can be attributed to that space. For example, if your business takes up 10 percent of your home and you spend $10,000 on home expenses, you can deduct $1,000. If you have a cleaning service and spend $2,500 a year to have your home cleaned, you can deduct $250.
The key word to keep in mind when claiming a home office deduction is ``reasonable,'' a word that actually applies to all the business expenses you claim on your tax return. The IRS will have a sense of how much you should be deducting. If you have a consulting business and you get your roof repaired, the government will look askance at your trying to deduct 50 percent of the bill.
You don't have to conduct all of your business activities from your home to qualify for the deduction. If you spend your work time visiting customers but do your administrative work such as billing and keeping your books at home, you can claim the deduction. It's a good idea to consult with a tax professional before you set up the home business, or, at the least, before you start compiling your tax return.
Then there's the matter of insurance. Don't assume your standard homeowners policy will also cover your business.
Check your policy, but also call your broker or the customer service number for your provider to be sure what is and isn't covered.
Someone who's a freelance writer at home may have some coverage under a homeowners policy. But the more complex your business, the more likely you'll need separate insurance. If a business visitor trips over a toy on the sidewalk or is nipped by your poodle, homeowners insurance might not cover the mishap. And if you have employees, it's almost certain you'll need additional liability coverage.
It's not just slips and falls you need to worry about. If you have a lot of business-related equipment in your home, it might not be covered in the event of a fire, natural disaster or theft. You also need to make the same determination for vehicles that are used for both personal and business purposes.
It may be possible to put a rider on your homeowners policy, rather than buying completely separate coverage. Check with your broker.
Before you start a business at home, you also need to be sure that you don't run afoul of local ordinances or zoning regulations, or any limits imposed by a homeowners' association.
Chances are it's fine to run something like a consulting or freelance writing business, said Barbara Weltman, a tax attorney in Millwood, N.Y., and publisher of a newsletter, ``Big Ideas for Small Business.''
But, ``if you think you're going to do something like detailing cars, you can't necessarily keep them on your front lawn,'' she said. ``The best thing to do is check.''
Weltman noted that home-based businesses also need to comply with licensing laws, including those that are industry specific. So, for example, if you're thinking of a business that involves food preparation, or you want to run a daycare center, you need to be sure you're fully licensed before you start the operation.