Starting A Small Business: Zoning And Tax Concerns For A Homebased Business

Zoning and Tax concerns for individuals starting a homebased business, new construction, quality of life issues, accounting methods and record keeping.

Zoning and Tax Concerns For A Home-based Business

Among the many considerations for individuals seeking to start their own home-based businesses are two major areas which the business owner must investigate before startup. Doing the proper research in the areas of Zoning and Taxation will give the new business owner a real head start in setting his or her business on the right track. It will no doubt require a huge investiture of funds for the prospective business owner to begin the new enterprise; giving time to understanding zoning regulations, IRS and local tax requirements should govern how the entrepreneur moves forward with business plans. Wise planning may save money and prevent legal pitfalls later.

What are the Zoning concerns of the home-based business owner?

Through zoning laws, local governments prescribe the use and development (improvement) of land in a given area. Zoning regulations control such things as the size of the building in relation to the size of the lot, open space on the lot, the number of residential units permitted on the lot, the distance between the building and the street or the building and the lot line, parking requirements and the placement and size of signs (advertisements). A potential business owner will need to take these zoning issues into consideration based on the type of business he is starting and what changes will be made, if any, to the structure and present use of his home.

As with laws of any kind, ideally, zoning laws are set in place for the public good. Most areas have three major types of construction zones: Residential, Commercial and Manufacturing. In a residential zone, most types of industries are excluded based on the affect it would have on local residents and their quality of life. Exceptions are made for community based businesses or facilities which offer service to the public, such as a library or a public school. What does this mean to the owner of a home-based business? He must insure that his business does not fall into the categories excluded by the residential zoning ordinances. In addition to the use of the premises, the home owner transacting business from his residence must make sure that any physical changes made to the building do not violate any zoning regulations.

For instance, in order to have space for a home office or workshop, will the business owner need to build an extra room or story on top of the home? If the home is in an area where only one story buildings are permitted, he may have to rethink the construction for the new home office. Perhaps he will have to build out, not up; even then, he will need to research if the rear extension on the home will detract from the amount of space that must be allotted to the back yard. Many people begin their business and construction without checking this type of information; however the business owner runs the risk of incurring thousands of dollars in fines, and ultimately, he may be required to terminate his business, depending on the severity of the infraction.

If the business owner will hire employees, these workers may need to park their cars when they come to work; or, he may have a business that requires clients to come to his location. Will this cause more traffic in the area and still more places along the street for the parking of cars? Will this affect the quality of life of his neighbors? If the business owner desires to advertise, there are provisions and exclusions governing the number, size and placement of signs on a residential building corresponding to the number of (family) units within. All of these are considerations for one seeking to start a home business.

Let's say a person is beginning a Tax Preparation business. If he is an authorized IRS e-filer, the IRS requires that that information be made public. So he or she must have a sign. Now all of his neighbors know that here is a place where they can conveniently go to have taxes done quickly. They may invite their friends and family. Now more cars and increased traffic is in the neighborhood. Parking spaces have now become an issue. The wise business entrepreneur will research these items before he or she undertakes to start his or her business.

Zoning regulations are public record. The potential business owner should go to the public library or his local department of buildings to research and review the local zoning laws to discover if his plans will meet with resistance or are acceptable to the local governing bodies. A homeowner may request a variance if his plans fall outside of the established guidelines. If accepted, he may be allowed to use his building or space for other than what the zone requires; this may require a public hearing where his neighbors are invited to voice their opinions on how the change may affect them.

What are the Tax concerns of the home-based business owner?

As with any other taxpayer, the home-based business owner should know that all income is taxable. However, an income tax return must be filed for all business income exceeding $400.00 dollars. In order to prevent stress and frustration at year end the business owner must keep perfect financial records from day one. Lots of individuals are afraid to report income because they feel that the IRS will eat them up with income taxes. This is not necessarily so; income is naturally offset by expenses. The home-based business owner may legitimately claim a whole menu of expenditures; the key is accurate, up-to-date record-keeping. If he stops at the local discount store to buy a role of Scotch tape for $.89, that receipt should be filed away and categorized, immediately, and added to an expense ledger or computerized accounting file.

Here are some of the tax issues of the home-based business owner: First and foremost the business owner should carefully determine and describe the exact nature of his business. The IRS measures the income and expenses of your business with all other like businesses throughout the country. Make sure your expenses and income are reasonable and comparative. Keep excellent records so that if ever called you can show exactly how and why you arrived at your bottom line. Depending on the type of business, the owner may use varying types of accounting methods which determine how records of income and expense are kept. He may use a cash method, an accrual method, generally used by those who have inventory, or a combination of the two methods, called "hybrid." The home-based business owner should determine what percentage of the home is used for business; is there a separate home office or is the family den doubling as a workspace? If the electricity and other utilities are paid based on the readings of one meter, the business owner must calculate how much of his utilities are used for the business and subtract from the total. If the business owner has purchased new equipment for the business, of course, all receipts should be kept for end-of-year deductions or depreciation. Equipment that has been around for a while and is now called into to business use can also generate a depreciation deduction. IRS Publication 334 is a tax guide for small businesses. IRS Publication 535 has important information concerning business expenses; IRS Publication 583 will help with record keeping.

The home-based business owner must become familiar with IRS forms needed to file at the end of the tax year; if he has employees he will want to know about W-2's, 1099's and 941's and insure that he has applied for an EIN number since he pays wages. Finally, the home-based business owner will need to research health insurance, retirement plans and safety precautions for himself and his employees, if any. All of this information may be obtained by visiting one's local IRS office, or from the IRS website.

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