NASE in the News

You Can Go Home Again

Know The Rules Before You Swap Commercial Space For A Home Office
By Jan Norman

The economy is tight. Customers are tight-fisted. Many micro-business owners are eyeing that monthly check for the lease of their commercial office and thinking of a thousand better uses for the money.

After all, technology is so advanced and inexpensive that many businesses can be run from a spare bedroom or the garage as easily as they can from Main Street. Increasingly, customers expect vendors and service providers to come to their location instead of the other way around. With the Internet, the micro-business owner and customer may never meet in person.

So why not save a pile of money by moving that business home?

The estimates of businesses that are run from a residence range from several million to 30 million, depending on who’s counting and what is considered a business. But before you have your micro-business join their ranks, do some checking to determine if you should — and can — run your business from your home.

Different communities and government agencies have different rules, and you could get into trouble costing thousands of dollars if you try to run your business from home without understanding those rules.

Types Of Businesses Allowed

Many cities that historically prohibited any commercial activity in residential neighborhoods now allow some home businesses. The guiding principle is “out of sight, out of mind.”

The business must not change the nature of the neighborhood. No traffic (meaning no customers, employees or delivery trucks coming to the house). No odors. No business signs. No work visible from the street (such as cars being repaired in the driveway). No extra strain on utilities (foundries and high-powered electronics are out). No equipment that interferes with television, radio and cell phone reception.

Those prohibitions still leave the home open to many types of businesses: consulting, residential services, light manufacturing or assembly, Internet auction sales such as eBay super sellers, and direct sales such as Avon cosmetics.

Typical City And County Restrictions On Home Businesses

Even with that wide array of businesses that might be allowed in residential neighborhoods, most communities and counties have certain restrictions and prohibitions.

Even within a city, certain businesses might be allowed in one neighborhood but not in another. Zoning can greatly influence your ability to run your specific micro-business from your specific dwelling.

For example, horse breeding might be permitted in certain parts of town where houses sit on several acres, but not in places zoned for apartments. Residences on busy streets may be allowed to have delivery trucks and a few customers every day, but not homes in quiet cul-de-sacs.

Before you move your business home, contact your local government’s zoning department or check the local library for a copy of the zoning ordinances. Find out if any laws would restrict or even prohibit your micro-business from operating successfully in your house.

City and county health departments also restrict certain types of businesses. Many of them prohibit food preparation businesses, such as catering or food manufacturing, at home. That work is restricted to licensed and inspected commercial kitchens. Check the rules in your community.

Some cities require home businesses to have a separate entrance from the dwelling part of the house. Some also require a fire department inspection before a business is allowed. It’s better to ask in advance than to have the expense, and possible fine, of being shut down for operating a home business illegally.

“The most important thing is to treat it like a business,” says Judee Slack, an enrolled agent who ran her tax consulting business from her California home for many years. “Do everything legitimately. Get all the licenses. Keep proper books.”

The Rules Of Homeowners’ Associations

Even tougher than city or county ordinances may be the regulations of homeowners’ associations that govern thousands of planned communities across America. Some of these associations have covenants, conditions and restrictions, better known as CC&Rs, that flat out prohibit any business.

You received a copy of those rules when you moved in, so check the language. Even if they prohibit your business, talk to members of the homeowners’ board about updating the rules. Emphasize the safety benefit of having home-based business owners in the neighborhood during the day when many people are at work.

Also investigate how the board has enforced the home business ban with other residences.

“If everyone is doing it, and no one is enforcing it, then you can probably stop it from being enforced at all,” says attorney Brett Weiss in Olney, Md. “If the president of the homeowners’ association has been running a home-based business . . . the association has to show that it treats everyone the same.”

Permits, Licenses And Fees

Merely locating your micro-business in a home does not exempt it from all the licenses and permits required in commercial locations.

Most cities insist home businesses have the same business license required of retailers and services in shopping centers and high-rise office buildings. Some may require a home occupation permit in addition to or instead of the business license. Check with your city’s licensing department.

Many types of businesses, from children’s day care to manicurists to building contractors, must have specific licenses or permits from the county or state. Ask trade associations or visit your state’s Web site to find out which businesses require occupational licenses.

Most of these business licenses and occupational licenses cost money. Some may require special training that also costs money. Don’t try to save a few dollars by dodging these fees. The government can shut down your business and impose expensive fines for such evasions.

Insurance For Home Businesses

Although you might save rent money by moving your micro-business into your home, don’t assume you can also save money on insurance. Many homeowners’ insurance policies don’t cover business activity and equipment. And in some cases the business might void your homeowners’ coverage.

The Independent Insurance Agents of America says that 40 percent of home businesses don’t have insurance because the owner thinks the homeowners’ policy covers the business too. However, a typical homeowner’s policy covers just $2,500 of business equipment kept at home and $250 away from the house. It usually offers no liability coverage for a home business.

Check with your insurance agent to find out what, if anything, your homeowners’ policy covers. You may be able to get an endorsement from the same insurance company to cover your business activities.

However, also get quotes from other insurers. Some companies offer better deals for home-based businesses than others.

Home Office Tax Deduction

You might think that moving your micro-business home will allow you to deduct a percentage of your home mortgage, utilities and maintenance repairs on your federal income tax return. And you might be right.

But, talk to your tax adviser first. You want to set up your home business properly to take advantage of this tax deduction and avoid costly audits, penalties and interest.

You can deduct a percentage of real estate property taxes, mortgage and utility payments, depreciation and repairs if you use a portion of your home regularly and exclusively for business.

That word “exclusive” is usually the stumbling block. For example, if you run your consulting business from a spare bedroom, you can use that room in your calculation only if you never do anything else in that space. No watching the television. No overnight stays by visiting in-laws. The room can be used only for business purposes.

Get a professional tax preparer to help you sort out the rules. Also, see IRS Publication 587, Business Use of Your Home. It’s available for free at www.irs.gov.