| Research Report 7.0 |
Home Office Primer |
If you have an office at home, you need to read this primer. Insurance, taxes, and Zoning all can have an effect on you and your business.
Ten million people operate a business out of their home. For some, it is the main business. For others, it is the basis for the extra income that puts the kids through college, buys the house at the lake or finances that special vacation. My mother sold Avon. A close friend operates a successful childrens day-care from her home for working parents. Our friends sell Amway.
I was at a meeting last week where 50 people signed up to sell shopping malls over the Internet. It seems like everyone does something. The second or third income is a necessity to keep the good life in reach. Unfortunately, most people do not have the resources to engage the professionals that the large corporations do, but the problems are much the same. Taxes. Insurance. Sales. Expenses. This primer should start you thinking.
The last few years have seen an explosion in the number of home based businesses and people working out of their homes - "telecommuters". While a home office can provide great flexibility and improve the quality of your life, business and legal matters must still be addressed. In addition to the usual concerns - picking a name, selecting the form of ownership, accounting and collection concerns; home offices present a few special issues. Following are some of those matters that should be considered before establishing a home office.
Zoning laws
Whether it is permissible to operate a home office greatly depends on where you live and the type of work. Most cities have zoning ordinances that dictate what can and cannot be done within a given area. Zoning laws generally designate areas of a city that are suitable for commercial, residential or other uses. In areas with expensive homes, home based businesses and/or home offices may be completely prohibited. Often, the zoning laws only replace restrictions on home offices. Those restrictions may relate to:
Traffic volume and parking
Signs
Number of employees
Hours of operation
Portion of the house devoted to business versus living quarters.
Be sure to carefully review the zoning ordinances in your city before establishing a home based business or home office. In some cities, a permit may be required, frequently at a fee.
Private restrictions
Private restrictions are those created by private parties, rather than the local city government. These may also restrict your ability to have a home office. Private restrictions frequently arise in condominium, co-op units and in planned-use communities. Real estate laws and practices differ throughout the country, and these restrictions may be located in one or more different places depending on where you live. These restrictions are usually found in the following kinds of documents:
The deed to the property
Condominium or co-op regulations
The property lease
The rules of a planned unit development or subdivision.
These documents are usually publicly available in the county recorder's office, from your community's developer, or the property owner, or the homeowner's association, or from a title insurance company or abstractor. You may need to review one or more of these documents to make sure there are no private restrictions applicable to your business.
Insurance
Do not assume that your homeowner's policy provides you proper protection with your home office. Most standard homeowner insurance policies specifically exclude coverage of loss of business property or liability for problems with business visitors. In most cases, your insurance agent can arrange for a relatively inexpensive rider to your policy to cover normal business risks. Make sure that the rider or new policy will pay the replacement cost of business equipment, computers, software and furnishings. Also, make sure that you are covered adequately in the event that a business visitor has an accident or is injured on your property. If your business takes you away from home, make sure that your insurance coverage protects against losses and injuries that occur outside the home. A good insurance agent can be a helpful advisor on the type and amounts of coverage that you need.
Taxes
If at all possible, you will want to deduct expenses related to your home office on your income tax return. Unfortunately, in March, 1994, the IRS announced new standards that will make it harder to qualify for that deduction. The IRS has two new tests, one of which you must satisfy, to qualify for a home office deduction. According to the first test, the essence of your business must be carried out at home to qualify. It is no longer enough that your home be a focal point of your business. For example, if you are in teaching, you probably won't qualify. The essence of your job is performed in the classroom, regardless of how much time you spend grading papers at home. If the first test does not produce a clear answer, the next test looks at how much work time you put in at home as compared to other locations. If you spend most of your work time at home, you may qualify. If you take a home office deduction, remember that it is a popular trigger for an IRS audit. Be sure to keep good records that will support your right under either the "essence" test or the "time" test.
Many books and articles have been written about home offices and home based businesses. Among the very best are two books by Paul and Sarah Edwards: Working From Home and Best Home Businesses for the 90's. There will be more research on this topic. Be sure and discuss these issues with your accountant and attorney to make sure you are protecting your business the best way you can.
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