Home Business Requirements

The idea of running a business from home has always had a
certain appeal--albeit one that can be easily undercut when
you actually wade through the complex rules surrounding
taxes, insurance and other details.

Getting started isn't as simple as plugging in a computer
and getting down to business. If you've set up shop at
home or you're thinking about doing so, it's now more
important than ever to understand what's involved and how
to use current home-work rules to your advantage.

Where the tax picture is brighter. Deductions are the name
of the game here, and the big question is: Do you qualify
to write off home-office-related expenses? To get the
"yes" answer you want, the IRS generally requires that you
use your home office "exclusively" and "regularly" for
business--meaning you can't transform your office into a
family room after business hours. Moreover, the home
office still has to meet one of three criteria. You're
fine if the structure that's used for your business isn't
attached to your residence, if you use the office to meet
with clients or if the office is your "principal place of
business."

So what can you deduct? In general, you can write off a
portion of expenses that pertain to your whole residence,
such as repairs, mortgage interest or rent, property taxes,
insurance and utilities. You can figure the deductible
percentage of these expenses one of two ways: Divide the
number of rooms in your office by the number of rooms in
the house (if they are roughly the same size), or calculate
the square footage of your home office and divide by the
square footage of the entire home.

Remember, though, that home-related deductible expenses
can't exceed the income generated by the business.
Expenses that pertain only to the home office--business
owners insurance or office supplies, say--are 100%
deductible and not subject to that limitation.

Zoning matters. This may not be the first thing you think
of, but local zoning laws can affect your home office. In
some cities, you need a business license and will have to
pay a fee every year. Other cities restrict the right of
property owners to build separate structures. Zoning laws
can limit the number of employees or clients in your home
office at the same time (or even forbid you from having
them). There may also be restrictions on how much of your
home can be used exclusively for business.

Insurance. What if an employee or a client gets hurt in
your office? Don't count on homeowners insurance to cover
you. A standard homeowners insurance policy provides no
business liability coverage and very limited property
coverage for business equipment. And if you operate a
business without your insurer's knowledge, things can get
murky. For example, if you are baking cookies to sell and
there's a fire as a result, you may not be covered. The
reason is that the business operation, not normal household
activity, was responsible for the damage.

One solution may be to add an endorsement to your
homeowners policy to cover your office property and
equipment, and general liability. This could run from $50
to $500 a year, depending on the nature of your business.

With some enterprises, you may need a separate business
owners policy, which offers more comprehensive coverage,
including business auto insurance, workers' compensation
and different types of liability coverage. Landscapers or
others who generate income off-site aren't even eligible
for an endorsement. Also, if lots of clients visit or you
have more than $5,000 in equipment, consider a separate
policy.

Because of the recent explosion of the home-office market,
some insurers have developed specialized policies, which
cost between $250 and $1,000 a year for property, on- and
off-premises liability and loss of business data or income.
Your best bet is to ask the agent who wrote your
homeowners policy to write your home-office policy. That
way you can be sure to avoid coverage gaps or overlaps.

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