Legal Questions Answered For Home-Based Businesses
According to the most recent figures released by the U.S. Census bureau, home-based businesses--where business is conducted primarily from someone’s home rather than from a commercial office space—comprise more than 50% of all businesses in the U.S. Here are answers to frequently asked legal questions for home-based business owners.
Is it legal for me to operate a business out of my home?
Check your state and local zoning laws which govern what kinds of businesses you can legally operate from your home. These laws also place restrictions on business signs placed at your home, as well as limits or regulations covering lighting, noise, and traffic. Common restrictions include how much parking can be used for your business, and how many employees you can have with your home-based business.
If your home is in an area that is zoned strictly for residential purposes, you may still be able to legally operate your business from your home if you can convince your local zoning board that your business will not have a negative impact on your neighbors or your community. You may be able to petition your local zoning authority for a special exception or variance that would allow you to operate your business from your home.
If you live in a homeowners’ association, review the governing association documents, including articles of incorporation, offering plans, bylaws, covenants, conditions and restrictions (CC&R,) and rules and regulations to learn whether you are permitted to operate a home based business in your community or whether you may be subject to fines or penalties. Similarly, if you rent or lease rather than own your home, you will need to review your lease agreement to ensure that you will not be in violation of the lease by operating a business on the premises.
Will my existing homeowner’s policy cover my home-based business?
Your typical homeowner’s or renter’s insurance policy will exclude claims arising out of business activities. In order to protect you and your home-based business, as well as your clients or customers, you may need to obtain additional coverage under your existing homeowner’s or renter’s policy to cover your business or purchase additional policies specifically for your business.
For example, if you will be running a business from your home in which your clients or customers will be coming to your home to transact business, your existing homeowner’s policy may not cover an accident or injury that befalls your customer on your property.
Can I deduct expenses of my home-based business on my taxes?
Operating a home-based business may provide some tax advantages in the form of deductions, but there are specific rules you will need to follow in order to qualify for those deductions. If your home-based business meets these requirements, you may be able to take some deductions from your income taxes related to the portion of your home used for your business.
First, your business must be operated out of a dedicated space in your home that is used only for your business and used on a regular basis for that purpose. Second, you’ll also need to show that your home is the principal place of business for your company – essentially, your company’s ‘main office’.
If you can satisfy these criteria, you are generally permitted to deduct the direct expenses associated with the part of your home used for your business, as well as a portion of your other expenses – known as indirect expenses - such as mortgage, insurance, real estate taxes, property maintenance, utilities, etc. that relate to that space. You can calculate these using the ‘standard’ method, which is based on the percentage of your home devoted to business use.
Alternatively, you can use a newer method permitted by the IRS for calculating this deduction, called the “simplified option,” which does away with most of the calculations, and instead provides for a straight $5 deduction per square foot of your home office or studio, up to 300 square feet.
Home-based business owners can also deduct unreimbursed business expenses related to business travel and entertainment, such travel for conferences or meeting with clients, including transportation, shipping of samples or display materials, tips, lodging and 50% of meals for business days.
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