Getting Your Home Business Off to a Legal Start

A home business can be an economical and efficient way to get your new business off the ground. But you'll want to check out these legal issues:

Zoning Restrictions

While your town or city may not have restrictions on home-based businesses, you should read your local ordinances to make sure. Some ordinances are worded so vaguely, it's difficult to interpret them. Other ordinances list specific types of business - such as professions or services - that are allowed, and exclude all other businesses. It's possible that your local ordinances will have a laundry list of appropriate occupations or businesses.

If you have doubts about whether your particular business is allowed after reading your local zoning ordinance carefully, you can contact zoning department personnel and give them non-identifying information as to the general area where you live and a generic description of the business.

You'll have the opportunity to appeal any planning or zoning board's rejection of a business in your home. It helps if you can show the approval and support of neighbors or others who might be affected by noise or extra traffic from your business.

Many condominiums and planned unit developments - such as closed or gated residential areas - have special rules called covenants or restrictions that restrict property use. It's important to read these covenants carefully, as neighborhood covenants are often strictly and vigilantly enforced.

Insurance Coverage

You'll want your homeowners' or renters' insurance to adequately cover your business equipment and property. Most homeowners' insurance policies require you to disclose when you start a home business. It's best to be upfront with your insurance agent and pay whatever additional premium is necessary in order to be properly covered.

Licenses and Local Taxes

You'll probably need to get a business license from your city or town, and register your business in order to pay local or state business and occupational taxes. If you profit from your business and don't pay these taxes as you go, you could be subject to back penalties and taxes.

Federal Income Tax Considerations

You can potentially save money on your taxes by taking a deduction for business use of your home. You'll be able to deduct some of the costs of utilities, rent, depreciation, home insurance and repairs of your home if you meet these requirements:

• You must regularly use part of your home exclusively for a trade or business. "Regularly" means on a continuing basis, not just once in a while. "Exclusively" means that you use that portion of your home only for business purposes, not for other purposes such as entertaining or family use.
• You must use your home as your principal place of business. That means you must conduct all of your business from your home, or conduct the administrative or management activities of your business at home and have no other fixed location where you conduct those activities.

If you sell products and store your inventory at home, you can deduct expenses for the business use of your home as long as you don't have an office or business location away from home and store the products in a particular area of your home. You can use the space for other purposes as long as you regularly store products there.

Even if your home isn't your principal place of business, you may still deduct expenses for the business use of your home or a separate building if you consistently use part of your home just for meeting with customers.

Sherrie Bennett is the former director and staff attorney at the University of Washington Student Legal Services in Seattle.

Related Web Sites:

IRS Publication On Business Use Of Your Home

Business Matters Message Board for more help