Home Based Business

A home business  is a small business that operates from the business owner's home office. In addition to location, home businesses are usually defined by having a very small number of employees, usually all immediate family of the business owner, in which case it is also a family business. Home businesses generally lack shop frontage, customer parking and street advertising signs. Such businesses are sometimes prohibited by residential zoning regulations.



The prospect of working from home has gained credibility over the years. Home offices can now compete with small commercial businesses and save on rent in the process. Faxes, high speed internet connections, dedicated home telephone lines, and cell phones help to make a home-based business a reality. Earlier home businesses had been where families lived on the second floor of their house while converting the first floor into a store, whereupon close of business they would secure the first floor and retire to the upper floors. This type of home business is still done in some rural areas.

Home-based businesses are quickly becoming the fastest growing form of business start-ups. Growing your company out of your home allows for flexibility that is difficult when renting or buying office and warehouse space. Although working at home requires self-discipline, the benefits can be substantial - especially in the start-up years.



When you rent or own office space, the size of your business is fixed to the size of the space. In the event where downsizing makes sense, you may not be able to do so quickly if you are signed to a long-term lease. Working from your home allows you to hire more people or fewer people, or simply work longer or shorter hours to right-size your business operations.



The tax benefits of operating a home office can be lucrative. If your situation qualifies, you can deduct a portion of your home’s expenses, such as mortgage interest, property taxes, utilities and repairs and maintenance, against your business income. To qualify, your home office must be your principal place of business and you can only deduct the proportionate amounts of the total expense which are directly related to your business. Although you cannot create a loss with your home office expenses, you can carry them forward to future tax years if you do not have enough business income to use them up in the current year.

One can hire his/her  responsible teenage son to keep inventory for the business, or the teenage daughter to walk dogs for the dog-sitting business. This results in an additional business expense deduction for one, as well as income for the child. Be sure to document all the hours worked by family members (or any employee you hire) in case you are ever audited.



Many home based businesses use IRS Schedule C to report income and expenses. All of the expenses listed above will be subtracted from your business income, most likely lowering your taxable income significantly (which is good, since your net income is what you will be taxed on).



A key for home businesses is accurate record keeping. You want to be prepared to turn over a neat log of all business expenses, complete with dates, amounts and confirming documents when appropriate, in case of an audit.



With your records in hand, your home business will be in good shape to reap maximum benefit from our tax system. Use the rules to your advantage to ensure as much profit as possible for your home based business.