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 home. If you are one of these people, here is some practical advice to consider before hanging our 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, 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 on 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 the 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 bill.

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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