| LEGALITIES & TAX ADVANTAGES
IN A HOME BUSINESS Every year, several thousand people develop an interest in 'going into business'. Many of these people have an idea, a product or a service they hope to promote into an income producing business which they can operate from their homes. If you are one of these people, here are some practical thoughts to consider before hanging out the "Open for Business" sign. In areas decided as 'Residential Only', your proposed business could be illegal. In many areas, restrictions rule out home businesses involving the coming and going of many clients, customers or employees. Many businesses that sell or even store anything for sale on the premises also fall into this category. Be sure to check with your local town hall to see how the regulations in your particular area may affect your business plans. You may need special permission to operate your business from home; and you may find that making small changes in your plan will put you into the position of meeting differing standards. Many communities grant home occupation permits for businesses that involve typing, sewing and teaching, but turn thumbs down on requests from photographers, interior decorators, and home improvement businesses to be run from the home! And 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. By all means, work with your council people, and save yourself time, trouble ... and cash! One of the requirements imposed might be off-street parking for your customers or patrons. And, remember, signs are generally forbidden in residential areas. If you teach, there is almost always a limit on the number of students you may have at any one time. Obtaining official approval for your business, then, could be as simple as filling out an application, or it could involve a public hearing. The important points the council officials will consider will centre around how your business will affect the neighbourhood. Will it increase the traffic noticeably on your street? Will there be a substantial increase in noise? And how will your neighbours feel about this business alongside their homes? To repeat, check into the local restrictions, and then check again to Page 2 determine if you will need extra permission. If you're selling something, you may need another licence, and be required to collect VAT on your transactions. The tax requirement would result in the need for careful record keeping. Licensing can be an involved process, and depending on the type of business it could even involve the inspection of your home to determine if it meets with local health, environmental, building, fire and safety regulations. Should this be the case, you will need to bring your facilities up to the local standards. Usually this will involve some simple repairs or adjustments that you can either do personally or hire out to a handyman at a nominal cost. Still more items to consider; Will your homeowner's insurance cover the property and liability involved in your new business? This must definitely be resolved, so be sure to talk it over with your insurance man. Tax deductions, which were once one of the beauties of engaging in a home business, are not what they once were. To be eligible for business related deductions today, you must use that part of your home claimed exclusively and regularly as either the principal location of your business, or the place reserved to meet patients, clients or customers. An interesting case in point: if you use your den or a spare bedroom as the principle place of business, working there from 8:00 to 5:00 every day, but permit your children to watch TV in that room during the evening hours, the Inland Revenue dictate that you cannot claim a deduction for that room as your office or place of business! There are, however, a couple of exceptions we will note to the "exclusive use" rule. One is the storage of inventory in your home, where your home is the location of your trade or business, and your trade or business is the selling of products at retail or wholesale. According to the revenue, storage space must be used on a regular basis, and be a separately identifiable space. Another exception applies to day care services that are provided for children, the elderly, or physically or mentally handicapped. This exception applies only if the owner of the facility complies with the local rules for licensing. To be eligible for business deductions, your business must be an activity undertaken with the intent of making a profit. It's presumed you meet this requirement if your business makes 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 use of your car or van. You can also claim deductions for home related business expenses such as water rates, and in some cases, even a new paint job for your home! The revenue is going to treat the part of your home you use for business as thought it were a separate piece of property. That 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. There is a limit to the amount you can deduct. This is the amount equal to the gross income generated by the business, minus those home expenses you could deduct even if you weren't operating a business from your home. As an example, mortgage interest is deductible regardless of any business activity in your home, so you must subtract from your business' gross income the percentage that's allocatable to the business of your home. You thus arrive at the minimum amount for home-related business deductions. It is always wise to keep meticulously within the proper guidelines, and of course keep detailed records if you claim business related expenses when you are working out of home. You should discuss this aspect of your operation with your accountant or a person qualified in the field of small business tax requirement. Do check the latest details with your local Tax office! |
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