Monday, March 15, 2010
So You Want to Start a Home Based Business?
This week I received a phone call from a dear friend wanting advice on working from home. My friend lost his job last year due to cutbacks. He was forced to take a "so called" early retirement, even though he was not even close to retirement age. This seems to be the norm these days. People are being let go from positions they've held for years and are looking for ways to regain the lost income.
My friend, knew that my company had elvolved from a home base start and needed some pointers about how to get started in his new vocation. Here are a few of the questions asked and what I shared. Perhaps, you too, are facing a job or career change and considering working from home as an option. If so, I hope you find some of my responses helpful.
What is needed to start a business from home?
First step is to check with your local township and state to see what types of license or permits may be needed. If you are going to be selling product, you may need to obtain a Resale Tax license so that you are not paying sales tax on product you purchase to resell. You will want to determine a name for your business. Most states require that you file for a "DBA" license or permit (doing business under an assumed name). There are fees associated with licenses and permits and the cost will vary from state to state. Your county clerk's office is a good starting point for gleaning valuable insight into what your particular state/county/or township may require.
Will I need to pay quarterly taxes to the IRS from my earning, or can I just pay at the end of tax year?
This is a question for an accountant. When setting up a home based business, I strongly urge you to contact a local accounting firm to assist with financial planning. An accountant can provide insight about whether you will want to be a sole proprietor, a Limited License corporation (LLC), or and INC. I personally opted for a LLC and hired an attorney to draft the necessary paperwork. Again, there are annual license fees involved for both LLC and INC businesses.
What expenses can I deduct with a home-based business?
This will depend on your business type. My friend's new company will provide a service which edits copy and offers "political ghost-writing". There is no inventory involved and home office space is limited to one room of the house. When I started my business, it involved inventory and an office. I needed a place to store the stock I would be shipping as well as a packing area. The dedicated business areas within my home were tax deductibe based on the square footage used. Any square footage you claim is usually depreciated over time and may affect any capital gain you might earn if you sold your home. For this reason, it's important to work with your accountant to determine how a home business could affect your home equity.
Here are a some of the things I was able to deduct when I started my home business. You will want to consult with your accountant and/or legal firm based on your business type:
1) A portion of my waste disposal bill. There was plenty of garbage related to business operations.
2) The land land and cell phones since they were used for business. I opted to have a separate land line installed just for business use.
3) If you have a web site, you can deduct the fees associated with your internet connection. This also includes any fees assessed by your web hosting company.
4) Don't forget to deduct advertising costs. This includes business cards, search engine ads for your web site, newspaper ads, or ads placed in trade publications. Do you plan to give away printed material, product, or samples to advertise your company.You will want to deduct the related expenses.
5) I was able to deduct a portion of my annual heating and utility bill based on the square footage of the home space I claimed as work related.
6) Do you plan to accept credit cards or have a business banking account. All of the fees charged for the use of these accounts is deductible. This includes any Paypal fees that might be assessed and deducted from payments you received for services or goods.
7) If you are mailing or shipping product or printed materials, keep all your receipts. This is also a deductible business expense.
8) Office supplies, packing materials, cleaning supplies (afterall, you do need to clean your work area), mileage and gas relating to work, licenses and permit fees.... all of these are business expenses you don't want to overlook.
9) And don't forget about your business equipment! Your laptop, desktop computer, printers, copier, desk, print cartridges, and fax machine (if used for business) should be listed as business expenses when filing your tax return.
10) Finally, don't forget about business related software purchases, service maintenance for equipment, insurance for your car and any liability or additional home insurance you have to cover business equipment and stock.
I have only covered some of the expenses that may be valid business deductions. If considering working from home, link up with an expert in your local area. The best thing I ever did when starting my company was to find a good accounting firm (and I'm not talking H & R block) and a specialized business attorney. You will also find a wealth of information and assistance at your local bank. My bank assisted with setting up my credit card gateway payments and business checking/savings accounts. You will be surprised at the many free services banks offer new businesses.