Beth Henkel spent much of her career working at large law firms as well as running Indiana's Department of Local Government Finance. But in February 2009, Henkel, who was 58 at the time and tired of the long hours, decided to try something new. She opened the Law Office of Beth Henkel LLC in several spare rooms of her house, in Indianapolis.
Henkel isn't alone in her decision to start a business out of her home. According to the most recent data from the U.S. Small Business Administration, 52 percent of the 28 million small businesses in the U.S. are home-based.
While working from home made her commute much easier, Henkel discovered that other job related issues remained complicated. She 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.
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 may provide extra 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 may run $500 for $1 million in coverage, Gaspar says. In addition, if you have a business with specific risks, you may require specialized coverage. Henkel, for example, carries legal malpractice insurance.
Don't think you can hide from the IRS now that you're 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.
Another tax rule that can benefit home-based workers is the home-office deduction. If you use space in your residence exclusively for business, you can deduct on your federal tax return the costs associated with that portion of your house. 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, tax expert and columnist 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.
Some municipalities forbid outright home-based businesses; others restrict certain types. Though this can be frustrating, it's better to find out the rules early, rather than have to cough up fines for violating local laws and be forced to relocate or shut down. What's more, some homeowners associations don't allow home-based businesses, so check the bylaws 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 TaxMama.com from her Northridge, Calif., home.
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.
Staying safe is as important as keeping your insurance up to date and paying your taxes on time. Henkel, for one, doesn't 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 suggests keeping home offices clutter-free, to deter trips and falls, and reducing fire risk by not overloading circuits with too many electronics.