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.