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Practical Tips for Working at Home

From taxes to insurance, here's what entrepreneurs need to know

From running Indiana’s Department of Local Government Finance to serving as counsel at two large firms, Beth Henkel, 58, is no stranger to big law jobs. But, in February, Henkel grew weary of the long hours and decided to take her business and go home — literally. She opened the Law Office of Beth Henkel LLC in several spare rooms in her house in Indianapolis.

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Henkel isn't alone in her decision to work at home. Of the estimated 29.6 million small businesses in the United States, about half are home-based businesses, according to the U.S. Small Business Administration. A recent report on entrepreneurship found that U.S. entrepreneurial activity is at its highest level in 14 years, with people ages 55 to 64 representing the second most active group, slightly behind those ages 35 to 44.

While working from home made her commute much easier, other job-related issues remained complicated. Henkel found herself challenged by the ins and outs of insurance, taxes, zoning, licensing and the like. Those obstacles don't go away just because you're wearing your pajamas to work. If you’re thinking of setting up a home office, here are some practical things to keep in mind.

Insurance. Before you open your doors, call your insurance agent or broker to find out what is and isn’t covered by your homeowners policy, says Timothy Gaspar, founder of Gaspar Insurance Services in Encino, Calif. Policies will typically cover basic office equipment, but the coverage often tops out at $2,500. Homeowners policies also usually exclude business-related liability claims by employees or customers who get hurt on your property.

If you have pricey equipment or a lot of foot traffic to your home, you should consider a separate business insurance policy. A typical policy might provide additional liability and business-equipment coverage, as well as loss-of-income coverage in the event you can't work out of your home due to, say, a fire. Costs vary, but annual premiums might run $500 for $1 million in coverage, Gaspar says. In addition, if you have a business with specific risks, you might require specialized coverage. Henkel, for example, carries legal malpractice insurance.

Taxes. Don't think you can hide from the Internal Revenue Service just because you're now working in the basement. Home-based businesses often face municipal or corporate taxes, just like their out-of-home counterparts. If your income is very modest, however, you are often eligible for tax exemptions. Ask your accountant.

Next: Look into local zoning and licensing laws. >>

Another tax rule that can work in favor of home-based workers is the home-office deduction. If you use space in your home exclusively for business, the costs associated with that portion of your house can be deducted on you federal tax return. Eligible expenses can include everything from mortgage interest and property taxes to utility bills and home repairs.

While the home-office deduction is widely considered an “audit trigger” for owners of home-based businesses, enrolled IRS agent Eva Rosenberg downplays that notion. “As long as you have documented your home office with a schematic, some photographs and copies of bills for the expenses you’re deducting, it’s fine,” Rosenberg says.

Zoning. Some municipalities forbid outright home-based businesses; others restrict certain types. While this can be frustrating, it’s better to find out early rather than cough up fines for violating local laws and be forced to relocate or shut down. In addition, some homeowners associations don't allow home-based businesses, so check HOA rules before you have business cards printed.

“You don’t want to invest a lot of money, and then find out that you have to change everything and move out,” says Rosenberg, who runs the TaxMama.com website from her Northridge, Calif., home.

Licensing. A home-based business may require licensing, even if the income stream is modest. Henkel, the stay-at-home attorney, advises home-based business owners to check with the city clerk's office or their state’s economic development department. Trade associations can also provide information on licensing requirements for specific professions.

Safety. Staying safe is equally important to keeping your insurance up to date and paying your taxes on time. Henkel, for example, doesn¹t receive clients in her home, opting instead to hold meetings at a local social club to which she belongs. Rosenberg advises opening a post office box for deliveries. Gaspar encourages home-based workers to keep home offices clutter-free to deter trips and falls, and to avoid overloading circuits with too many electronics so as to reduce fire risk.

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