Home Businesses Can Be Winners

hbcbwThinking of starting a business at home? You’ll find out fast that making money is your second-biggest challenge. The first is learning how to run a professional operation that customers and clients respect.

I learned the hard way. I remember the day I was interviewing a prominent financier by phone when tile puppy I’d stupidly parked in my office suddenly, loudly, had to go out. And the time I was running errands and my 6-year-old took my business calls. (Even worse, he didn’t tell me about them.) A lot of women start a home business so they can be with their children. But many discover they need some form of child care, just as office workers do.

As for setting up the financial side of your home-based business, finding a good accountant is a must. You need to know how to keep your books, what’s tax deductible, what taxes your business is liable for, and what personal expenses your business can legitimately cover.

Other smart moves:

Open a business bank account. Mixing your business and personal accounts makes it harder to do your tax returns. Get a vendor number from your state fill most places, you apply to your state’s retail sales tax division). The number enables you to save money by buying supplies wholesale.

Apply for a merchant card, which lets you accept credit-card payments. Banks don’t give merchant cards to home-based businesses unless they have long track records. But you may be able to qualify through membership in a home-business organization. For a list of such organizations, send six dollars to Barbara Brabec, consultant and author of Homemade Money, P.O. Box 2137, Naperville, IL 60567.

Talk to your insurance agent about covering your inventory and supplies, business equipment (including computer and fax), and liability if a client or employee is injured on your property or by using your product. Your basic homeowner’s policy may be enough for property loss. But for liability or to cover new equipment, you’ll need to add a rider. There are separate policies for more elaborate business needs.

If you don’t have health insurance through a spouse and can’t find an individual policy you can afford, Brabec has another six-dollar list of small-business organizations through which you might be able to buy coverage. Your business can also pay and tax deduct any out-of-pocket medical and dental costs, including bills that our insurance policy doesn’t cover. You do this by hiring your spouse, then setting up a medical reimbursement plan for your employees and their dependents. That way, you can be covered as your spouse’s dependent, says Dan Gleason, president of the consulting firm My Tax Man in Ocala, FL.

Keep careful records of your business expenses, including equipment, supplies, wages paid, and miles driven (deductible at the rate of 31 cents a mile this year). If your home phone is also your business phone, you cannot write off the cost of basic service – only the added business costs, such as call-waiting and business-related long-distance calls. A better idea: Get a separate (thus fully deductible) business line.

If your business makes no money, you can write off these costs against any other income you have from another job or from your spouse’s job. That reduces your total taxable income, and therefore cuts your taxes. As a general rule, however, you have to turn a profit in three of the first five years. Otherwise, the IRS can disallow all past deductions that exceeded the income your business earned.

Your office can be a room or a portion of a room, but in order to qualify for a tax deduction, it has to be used exclusively and regularly as your principal place of business. To figure out your deduction, compare the size of your office to the rest of your house. If you’re using 10 percent of the space, you can write off 10 percent of your homeowner’s insurance, general home maintenance such as painting, and the bills for heat, electricity, and trash removal, among other things. Home-office expenses, however, can’t exceed your net business income – so the more you earn, the more you can deduct. (For more on taxes, call the IRS at 800-TAX-FORM, for the free publication, “Business Use of Your Home.”)

Another money-saving strategy: Hire our kids and a them tax-deductible wages instead of an allowance. No Social-Security taxes are owed if they’re under 18 and your business isn’t incorporated. (Most home businesses don’t have to be. “But the children have to do real work and be treated as real employees,” says Larchmont, NY, tax attorney Julian Block. That means preparing W-4 forms for tax withholding, even if the kids don’t earn enough for taxes to be withheld, filing quarterly Al forms showing wages paid to family employees, and issuing annual W-2 forms.

Generally, you can put up to $2,000 of your earnings each year into a tax-deductible Individual Retirement Account (IRA). If you hire your husband to keep the books or do other part-time work and pay him at least $2,000, he may be able to start an IRA too. (Ask your accountant if he qualifies.) If you can afford to put away more than $2,000, you might start a Simplified Employee Pension (SEP) plan – available through banks, brokers, and mutual funds-and save even more.

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