Home-Based Business... Is It For Me? (continued)
EB-44, August 1999
After you know what type of business you want to start, it is necessary to research the
options for selling your product or service. Marketing includes all activities involved in
getting goods and services to the customer from the producer, such as market research
(potential), advertising and promotion, pricing and customer relations. A good marketing
plan is just as important as a good business plan.
Some people will study the market and design a product or service to fill the needs
identified. Others will design a product or create a service and then look for a place to
market it by creating a demand in the market for the product or service. Both systems can
work well depending on the product or service, although the first method is generally more
successful.
The first step is customer identification. Develop a customer profile to help determine
if the idea or business will be successful and to direct advertising and promotional
efforts. For example, you will want to identify if you will be marketing to mothers of
preschoolers, single men or women, dual career families, senior citizens, adolescents or
other specific groups. Additional information such as educational background, income
levels, type of housing, etc., may be needed.
Trade associations can provide information on the customer profiles for the types of
businesses they represent. Additional census information concerning characteristics of the
population for North Dakota can be obtained from the State Census Data Center, NDSU,
Fargo, North Dakota 58105 (National census information can be obtained through the
Internet under U.S. Census Data) city directories, plat books and your local NDSU
Extension Service, chamber of commerce and economic developer may be helpful for local
information.
One aspect of determining the market for your product or service is to identify your
competition, if any. Are there similar products or services offered? Compare the quality,
features and value of your product or service to the competition. Identify the attributes
that you should emphasize to create a unique need or to be most appealing to the customer.
You may have to offer special services, such as pickup and delivery or credit card
payment, to increase the appeal of your product or service.
Determine what share of the market you should strive for. Would that share of the
business be worth all of the effort? Determine if there is room for you and your
competitors, and potential for expanding the market. If there is no competition, find out
whether your product or service can be promoted successfully to create a demand for it.
Marketing is a continuous process, and you should not neglect it once you launch your
business. You need to be aware of trends and changes in your market so you can respond to
them. If your product or service is not selling, consider changing it, its price or name,
the function of the product or service, or your distribution channel.
Remember, perseverance and flexibility can keep you in business. If you establish the
fact that people need and will pay for your product or service, identify the appropriate
market and appeal to those customers' particular needs, you should have a successful
business.
Business Management and Image
Experts on home-based business management report a direct relationship between certain
business management practices and income produced. These practices include having a
highly serious attitude about the business; maintaining a well-equipped office; using the
yellow pages for advertising; using professionals for advice; securing a business
bank account; incorporating the business; operating within all local, state and federal
laws and regulations; making sure the telephone is answered during business hours; hiring
employees; belonging to professional associations, and using delivery services. Other
practices that are important to a good business image are being well groomed and
appropriately dressed; having an orderly and clean workplace; posting your business hours
and following the schedule; having good quality printed materials; maintaining good
customer service, and using good manners at all times.
Customer Relations. Good customer relations are essential for any business.
Money spent on advertising and promotion could be wasted if the customer is not treated
appropriately. Business people and their employees should deal with customers in a manner
that neither offends them nor allows them to take advantage of you or your business.
Establish business policies on dealing with customers before you open for business. Try
to anticipate problems, objections, or special situations that may occur and determine how
you want to deal with them. Try role playing possible situations that employees of your
business may encounter.
Strive to convince customers that you are genuinely interested. Providing a good
product or service reinforces this. Work that fails to satisfy you or the customer is a
poor advertisement for your business. According to consumer surveys, a person who has had
an unpleasant experience with a business will tell on average 9 to 10 other people. Some
may tell as many as 20 people or more.
Solving complaints promptly may not only bring customers back, but they will have
something positive to talk about. Customers who have had a good experience with a business
will tell an average of five other people, some of whom may become new customers.
Business cards. A professionally printed card is an asset to almost any
business. Include your name, address, phone number, products or services you provide and
an attractive logo if you have one. Cards done on personal computer are appropriate if
attractive and look professional.
Letterhead and envelopes. Printed letterhead shows your customers that you are a
professional business person. You may want to announce your business by mailing notices to
prospective customers. Letterhead stationery may also be necessary when purchasing
materials and equipment for your business. Many wholesale outlets will not sell to you
without it.
Business phone line. The business phone should have a separate line and be
answered promptly during business hours by a person or answering device.
Advertising, Promotion and Distribution
The difference between advertising and promotion is that advertising is easier and more
effective once you identify your customers and determine market potential. This will help
you to determine when, where, what and how to advertise. Advertising lets prospective
customers (target market) know about your product and makes them want to buy from you.
Effective advertising gets the right message to the right audience at the right time plus
is measurable so you can determine if it is increasing sales. It creates a business image
in the customer's mind, increases customer information, about the business and attracts
customers.
Choose forms of advertising and the distribution method by their appropriateness to
your business. Remember to use a mix of advertising methods. Experts say to not spend your
entire advertising budget on one type of media. Take advantage of every opportunity to
promote your business. Promotion can be done through news stories of your grand opening or
local radio news programs.
Computer marketing. The newest form of advertising and marketing is on-line. It
is estimated that over $1 trillion worth of commerce will be done over the Internet by the
year 2002, and that most of the products sold will be by entrepreneurs. Advertising can be
done for little cost on local bulletin boards and community pages, to sizable monthly fees
for sophisticated marketing services. To sell on-line you will need to establish an
attractive web page with quality pictures and exact descriptions of your products. You
will also need to be ready to accept credit card orders. An advantage to marketing this
way will be your access to a much larger market.
Word of mouth. Word-of-mouth advertising can be a powerful medium for a
home-based business in the local area. It is sincere, believable and unsolicited. It is
also uncontrollable, so you will want to make sure that it is positive advertising. It is
largely up to you to make sure that your product and the experience your customers tell
others about is the kind of advertising you want. Be professional and prompt, meet
deadlines, keep appointments, and do not accept more work than you can deliver. These good
business practices and friendly hospitality will enhance your business and make people
want to come back. It takes time to build a reputation.
Brochures/Hand-Out Flyers. A brochure or flyer can be small, inexpensive and
attractive and is an excellent method to advertise your business. Get advice from a
printer or hire a graphic designer to help with the layout of pictures, text and
lettering. Do not invest money in these items if you did not consider how either will be
used or who it will be used for and it is constructed in such a way that it will be
opened, read and responded to. They have many uses but are wasted if not well planned.
Direct mail. Mailing brochures or letters to businesses or people likely to
become customers may be helpful when you first open your business. Mailing again at
regular intervals throughout the year also may help but you must keep an up-to-date
mailing list. Direct mail is most effectively used on clients within a 50 mile radius of
your business if it is only used to advertise and not for orders. If orders are
taken, distance is no object. It adds a personal touch as a direct communication between
you and your customer. Mailing can be expensive and should be weighed with the other
options.
Bulletin boards. Post professional looking brochures, flyers or business cards
on public bulletin boards in restaurants, grocery stores, laundromats, apartment
complexes, schools or anywhere visible to your target market. It is common courtesy to ask
permission to post. Some locations specify where posters can be used or may not permit
their use.
Newspapers. Contact the local editors and tell them about your new service or
product. An editor may want to do a feature story, especially about your grand opening.
Getting an article may be easier if you can tie into the activities of a charitable
organization, a benevolent group or a community activity. Include a black and white
picture and send along a news release. An article like this is promotion and not
advertising, but may be very effective.
Newspaper advertising should be done on a consistent basis. People need to see your ad
several times before it will stick in their minds. Ask to have your ad placed in the same
place each week and preferably on a page that is highly read. Placement does make a
significant difference in whether or not an ad is noticed. Color and size also make a
difference but do cost more.
Classified ads are usually inexpensive and appropriate for a small business. Run ads in
local newspapers and shoppers' guides in your community.
Shows and displays. Depending on your type of business, it may be appropriate
to display some of your work in a public library or bank along with your business cards
for people to take. You can also use road signs.
Other businesses. You may want to advertise in a business that is complementary
to yours. For example, a fabric store for alterations or gourmet food store for cooking
classes. This type of advertising benefits both businesses.
Yellow pages. Check with the phone company for the time of printing for the next
book. Be sure to get your business name in the white pages and consider a yellow page ad.
A listing in the yellow pages can be helpful but may have a charge, so check with your
local phone company. Always consider your customer. Would a potential customer consult the
yellow pages looking for your type of product or service?
Local radio and TV. Many radio stations have local talk shows. Call the
directors and see if they are interested in discussing your new business. Radio ads give
you the flexibility to choose the audience that will hear your advertisement. This can be
done by choosing the station and time of day the ad is broadcast. The radio sales agent
can help you to design your ad to meet your goals.
Television ads can be effective but are very expensive to produce and run. Local cable
companies may provide low cost space on their cable access page. Distribution can also be
accomplished via television. Shows like QVC and other home shopping shows are popular and
effective, but you must have a significant supply on hand that can be shipped immediately.
Infomercials are also gaining in popularity but are very expensive to produce and air.
Specialties. You may want to offer matchbooks, pens, calendars, decals, balloons
or other tokens of appreciation for doing business. Many of these items have long-term use
and make good seasonal gifts. You could print stickers or labels to attach to every
product. However, labels may be expensive. Weigh the cost and the advantages of the items
depending on your particular business.
Telemarketing. Telemarketing is a sales approach that is done entirely by the
phone. It may be selling to customers who call or calling potential customers.
Selling on Consignment. You may choose to sell on consignment, where the retail
store displays your products, advertises and sells them for you. For this service, they
charge a flat fee of 30 to 50 percent of the selling price. The store generally pays its
consignors once a month for merchandise sold. A consignment store should reflect a neat
and friendly yet businesslike appearance. Other merchandise in the store should be similar
in quality to yours. The store owner should be able to suggest realistic selling prices
for your products.
Since you own the products until they are sold, the store is not responsible for theft
or damage. Another disadvantage is that your money is tied up in the merchandise until it
is sold. It's in your inventory, not the store's. If an item does not sell, it may be
returned to you in less than salable condition or be out of date. Inspect written
agreements carefully. Make sure to include all of the details you find necessary to
protect your investment, including length of shelf time.
Chamber of Commerce. Joining the local chamber of commerce and other
professional organizations is a good opportunity to make valuable contacts and participate
in community activities. It also helps makes your business visible.
Additional ideas and information can be obtained from the following:
- Read magazines, trade journals and observe competitor ads in newspapers.
- Talk with public relations people and others who promote products and services to find
out the best ways to advertise your business.
- Attend trade shows. The wholesalers and distributors have excellent ideas on what they
would do if they were in your shoes. If you are wholesaling, visit with your suppliers.
Gain contacts to meet with others who are in a business similar to yours. If you are not
in their market or potential market, many will be glad to share their expertise.
- Consult people in the franchise business or in unrelated franchises if you are
considering this form of business. Determine how they reach their clientele and learn
their repeat sales techniques and the preferences of those customers.
- Depending on the suitability of your business, don't overlook parades, mall shows,
gallery shows, street fairs, summer festivals and county fairs.
Plan your advertising based on a set budget. This can be determined by spending:
- The same amount as last year.
- What the competition does.
- A percentage of your sales.
- To meet your objectives (example: increase sales by 10 percent).
Regular, steady, targeted advertising attracts more customers than splashy,
appeal-to-no-one advertisements. Zero in on your specific target audience with
cost-effective advertising. Plan an appropriate advertising theme using the name of your
business and featuring a logo (if you have one). People tend to remember and trade where
there are catchy (not overly cute) names, slogans and logos.
Setting the right price
What you charge for your product or service can range from an educated guess to an
orderly analysis of the cost to produce the product or service, the overhead of your
home-based business, and the profit you want. Those who guess are risking the success of
their endeavor.
Other factors which influence the price are type of business (retail, service or
product), quality of the product, competition, demand for the product, pocketbook status
of your customers, and weather or seasonality. Realistic prices attract customers and
build sales volume. Whether you are high priced so only a select few can afford your
product or service or lower priced for greater appeal, be sure the return is enough to be
profitable. You won't last long if too few come to your door or if your prices are so low
you do not make a profit.
The total cost of producing a product or service is composed of direct costs + labor +
overhead costs. This cost information is used as a basis for setting prices and profits.
The more exact the figure the greater your chance for success. You may wish to consult
your trade association and your accountant to learn what the best current practices, cost
ratios and profit margins are for your business. A good information source on calculating
ratios is "Rural Retailers: Financial Profile of High-Profit, Medium-Profit and
Low-Profit Firms", North Central Regional Extension publication NCR555. Call Michigan
State University at (517) 355-0240 for cost and how to order a copy.
Costs - The direct material cost includes parts or merchandise, supplies,
shipping, handling and storage, etc., anything that is directly related to the production
of the product or service. The labor costs include all wages paid to employees,
including the owner. Exact labor time is needed. This cost includes fringe benefits,
Social Security, Workers Compensation, holidays, vacations, hospitalization and other
labor-related costs.
The overhead cost includes all job-related costs except the direct materials and
labor listed above. Included are utilities, interest, clerical, supply and janitorial
employees, taxes, depreciation, insurance and transportation. A portion of the total
overhead cost is added to each product price or service fee, so these overhead costs will
be paid for over the year. Overhead expenses can be determined as a percentage of direct
costs plus labor. To determine the overhead percentage for the business, add up the total
overhead expenses for a year. Next, divide the total amount of direct costs + labor for
the year into the first figure.
Overhead Expenses/(Direct Costs + Labor) = Overhead Percent
For example, if direct costs plus labor for a year added up to be $10,000 and
overhead expenses for the year added up to $2,000, that would be $2,000 divided by $10,000
for an overhead of 20%. This percentage should be re-evaluated on an annual basis.
Profit. Profit is the income left over after all direct costs, labor, and
overhead expenses have been paid. To do this a profit factor or profit margin must be
calculated in initial pricing. The profit factor is added to get the final price.
Total Costs + Profit = Price
Generally adding a 10 to 20 percent or more profit margin (% of direct costs + labor +
overhead expenses) is standard for most home-based businesses. A mistake many owners make
when first starting out is not adding in a profit margin to their pricing strategy. If
this is not done, there will be no money for growth or expansion of the business.
Retail Price. Up to this point you have only figured your wholesale price. To
figure the retail price a retail margin must be added. This is usually two to three times
the price.
Price x Retail Margin = Retail Price
or
(Direct costs + Labor + Overhead Expenses + Profit) x Retail Margin = Retail Price.
The percentage a retailer adds to the wholesale price he pays for an item is called the
markup. If you wholesale and retail you must be careful not to compete or undercut your
wholesale customers. For example, an artisan wholesales pottery to gift shops and also
sells the pottery directly to customers at craft fairs. The artisan should sell the
pottery at retail prices at the craft fairs.
Break-even analysis. Prices charged must exceed total costs or there is no
reason to be in business. To look at the big picture in pricing you need to do a
break-even analysis or the point at which sales are exactly equal to costs. The
basic equation used for this is: sales = variable expenses + fixed expenses. For example,
let X represent the number of units to be sold to break even or zero profit. Suppose the
cost per unit of X is $.45, the selling price per unit is $1.00, and there is a fixed cost
of $275 to manufacture product X. How many units of X must be sold to break even?
1.00X = .45X + 275
1.00X � .45X = 275
.55X = 275
X = 275/.55
X = 500
In this case 500 units of X must be sold to cover all costs. In dollar terms, the
break-even point is $500 in sales of product X (500 units @ $1.00 per unit).
Using the same example, suppose you want a profit of 20 percent of sales. You would
simply add 20 percent of $1.00 to the top of your equation or 1.00X = .45X + 2 X 75 + .20
(1.00X). Now to cover all costs and make a 20 percent profit on sales, 786 units must be
sold for a total sales volume of $786.00 ($1.00 times 786).
Other Pricing Considerations. As with all businesses, prices will vary depending
upon your clientele, competition and demand. Remember to base your prices on a fair market
value and not personal preference. In the service area there may be some things you'd
rather do and others you'd rather not do. Charge the same hourly rate for all of your
work.
Some service providers double the expense of the job. Others add a commission fee to
the cost while a third group charges a flat hourly fee. As with all business practices,
it's wise to figure the various methods and choose the one which fits your business best
and returns the profits you need.
Evaluation - To find a reasonable price, take the highest and the middle price
range of similar products or services to determine the market value of your own. As a rule
of thumb take half of this retail price average. Is your wholesale price similar? If your
price is higher, you'll need to lower your overhead or improve your production. Avoid
cheapening your materials and supplies, for this will affect the quality of your product.
If you cannot produce at a competitive price, drop the item(s) from your line.
Customer and Competition - If customers question the price you ask by comparing
the products to ready-made products or other handcrafted items, you might stress the
quality of custom work and the skill or talent needed to produce it. You may provide
personal service that others do not. Do not compromise yourself or your products.
Limit discounts to family and friends, and discount only as low as the wholesale price.
If competitors sell for less than you do, don't be tempted to lower your price. You
probably have other advantages to your product and services you can stress — gift
wrapping, delivery, a wider selection, etc. If the lowered price continues for an extended
time and your business is hurt, you may have to lower your overhead costs to enable you to
lower the price, change the product so it is no longer in competition or discontinue that
particular item.
What the Market Will Bear. Understanding the market and what customers will or
will not pay directly impacts pricing. Sometimes the cost of producing the product or
service is too high, and no matter how great it is the market is just not willing to pay
the price. On the other hand, maybe the market will pay a much higher price than the
actual cost of producing the product or service.
Money is the lifeblood of any business and keeping track of the flow coming into and
going out of your business is essential to its survival, growth and profit. Good financial
records are used to help show how profitable your business is, identify areas where
profitability can be improved, revise price lists, remember clients and prepare complete
and accurate tax returns.
Records need not be complicated or elaborate. The key to an effective and efficient
bookkeeping system is to get it set up right in the first place. It must be simple to use,
easy to understand, reliable, accurate, consistent and designed to provide information on
a timely basis. An accountant can assist you in setting up your books or advise you on the
use of a record keeping computer software program like Quicken� or QuickBooks�. Many
small business owners are finding that bookkeeping software and computer spreadsheets cut
their bookkeeping time substantially and provide quick and easy access to business
information.
Every home-based business should use a business checking account separate from your
personal checking account. The business checkbook is the simplest system for only a few
transactions. All disbursements of cash must go through the checkbook. Deposit slips can
be used for sales transactions. Record on each check and deposit slip the details of each
transaction. Every check needs a written document to support it, such as an invoice,
payroll summary, or bill statement. Reconcile the checkbook with your bank statement
monthly to provide a frequent summary of revenue and expenditures.
A more complete system uses the checkbook plus a cash receipts journal and a cash
disbursements journal to record each transaction. Additional forms may be needed depending
on the type and volume of business. Inexpensive journals and business forms are sold in
variety stores, stationery stores and business supply firms.
The cash receipts journal (Appendix C) has
columns for various categories of receipts with a line for each receipt including date,
source of cash and total amount. Depending on the type of business, the column categories
may be by type of merchandise or service or even by departments. All columns of the cash
receipts journal should be totaled each month with year-to-date totals after each month.
A sales slip (Appendix D) is essential to
record the merchandise or service sold, especially if you have several transactions which
cannot be immediately entered in the cash receipts journal or offer sales on credit.
Carbon sales slips provide both you and the customer with a record of the purchase. Choose
a sales slip which includes customers' names and addresses that can be used in developing
mailing lists.
Information from each sales slip can be easily recorded in the cash receipts journal or
a sales journal if it is a charge sale. In some cases, daily or weekly summaries of sales
should be entered. This should be done on a regular schedule for ease of comparing.
The cash disbursement journal (Appendix E)
can have columns for various categories of expenditures with a line for each
expenditure including date, check number, payee, description of expense or purchase and
total amount. The column categories may be merchandise for resale, supplies, interest,
utilities, taxes, occupancy costs, services performed, owner's salary and other common
purchases or expenditures depending on the type of business. All columns of the
cash disbursements journal should also be totaled each month with year-to-date totals
after each month.
An invoice (Appendix F) is a bill submitted
to you by a vendor or supplier for the merchandise you receive from them.
The invoice may be attached to the merchandise, mailed separately with each order,
or mailed at specified intervals (usually monthly). Always check the invoice
against the merchandise received. Some vendors allow only five days to inspect the
merchandise and confirm the invoice amounts. Then place the invoices in the
"bills" file so you can pay them when due.
A business person deducts cost of operations (expenses) for tax purposes and for
determining profits and losses. Some deductible expenses include: maintenance of
equipment, supplies (business cards, postage, envelopes, record keeping supplies, etc.),
insurance, licenses, interest, utilities, taxes, advertising, mileage if you use your
automobile for business, professional update expenses (books, magazines, costs to attend
workshops or classes), professional services (lawyer or accountant) and contract labor.
Billings for other expenditures or services will usually have a customer copy (invoice)
which should be recorded in the cash disbursements journal when paid and kept in the file
for tax purposes.
A person using a personal automobile for business purposes must keep a log of the
mileage if the vehicle is not used full time in the business. A simple notebook organized
similar to the sample auto log provided will be sufficient (Appendix G). A standard mileage deduction allowed by IRS
can be used. Alternatively, actual expenses or the business portion of gas, oil, repairs,
depreciation, etc. may be deducted if it is to your advantage to do so. This method
requires accurate records (and receipts) throughout the year. If a standard mileage
rate is not used in the first year of service for a vehicle you may not use it in future
years.
Some home-based business people hire independent contractors to do work for them from
time to time. If you do, make sure that you check with an accountant or the IRS for
submission of the required forms.
An inventory control card for each item may be needed for some businesses when
purchasing merchandise for resale. This will help you keep a record of the merchandise and
how much money is tied up in these items. A semi-annual physical inventory (count) should
be taken to confirm the amounts on hand and on record to detect any losses or
discrepancies. The sample inventory control card (Appendix
H) shows the maximum and minimum number to keep in stock, the number of items
received, the number sold and the balance on hand. This information can be obtained from
sales slips and purchase invoices. Inventory can include more than finished products. For
a manufacturer it includes unused materials.
Tax Considerations of Home Use
When you operate a business in your home, additional expenses for the home may be
deducted. The IRS has certain criteria that must be met in order to take a business
deduction for your home.
A "home," for tax purposes, includes a house, apartment, condominium, mobile
home, boat, or similar property. It also includes other structures on the property such as
an unattached garage, studio, barn or greenhouse.
If you operate a business out of your home, you are allowed to deduct a proportion of
the costs for operating and maintaining your home as a legitimate business expense. In
order to take a deduction for using part of your home in business, the following parts
must be used exclusively and regularly:
- As the principal place of business for any trade. Beginning in 1999, your home office
generally will qualify as your principal place of business if two tests are met: you use
it exclusively and regularly for the administrative or management activities of your trade
or business, and you have no other fixed location where you conduct substantial
administrative or management activities of your trade or business.
- As a place to meet or deal with your patients, clients, or customers in the normal
course of your trade or business.
- In connection with your trade or business, if you are using a separate structure that is
not attached to your house or residence, such as a studio, garage, or barn. This structure
does not have to be your principal place of business or the place where you meet patients,
clients, or customers.
Exclusive use means that you must use a specific part of your home only for the
purpose of carrying on your trade or business. If you use part of your home as your
business office and also use it for personal purposes, you have not met the exclusive use
test. If a personal computer located in the business part of your home is used for both
personal and business activities, the home business deduction would not be allowed.
Regular use means that you use the exclusive business part of your home on a
continuing basis. The occasional or incidental use of a part of your home does not meet
the regular use test even if that part of your home is used for no other purpose. An
occasional sale of a hobby item would not qualify as regular use.
Two exceptions to the exclusive use test are for the storage of inventory and as a
day-care facility. Expenses relating to the use of part of your home for storage of
inventory or product samples may be deducted if all of the following tests are met:
- The inventory must be kept for use in your trade or business.
- Your trade or business must be the wholesale or retail selling of products.
- Your home must be the only fixed location of your trade or business.
- The storage space must be used on a regular basis.
- The space used must be a separately identifiable space suitable for storage.
Expenses can be deducted by using a part of your home on a regular basis to provide day-care
services if the following two requirements are met.
- You must be in a trade or business of providing day-care for children, persons 65 or
older, or persons who are physically or mentally unable to care for themselves.
- The owner or operator of the day-care business must have applied for, been granted, or
be exempt from having a license, certification, registration, or approval as a day-care
center or as a family or group day-care home under any state law.
The portion of the expenses of the home that can be deducted for business use is
usually determined on an area basis (square-foot) or on a time-usage basis. The area used
for business purposes should be divided by the total area of the home. For example, a 120
square foot area of a 1,200 square foot home would provide a 10 percent rate for business
expenditure deductions.
120 sq. ft.
-------------- = .10 or 10%
1200 sq. ft.
The deductions for day-care facilities must be figured on a time-usage basis. The days
used for business should be multiplied by hours used per day, then divided by the total
available hours per year. To determine the percentage rate for business expenditure
deductions. Example:
220 days of child care x 8 hours/day = 1760
---------------------------------------------
8.76 hours 8,760
(365 days x 24 hours) = 20%
The overriding rule on home business expenses is that you may not have a loss (for tax
purposes) resulting from deductions for the business use of your home. You can carry over
expenses to the next year. Expenses for the business use of the home can be deducted in
the following order:
- Real estate taxes, mortgage interest and casualty losses, if any. The portion allocable
to business use is deductible.
- Direct expenses that benefit only the business part of the home, which include painting
or repairs made directly to the specific area of the room used for business (except
day-care). These direct expenses are fully deductible.
- Other indirect expenses such as rent, utilities and services.
- Depreciation - a portion of the value of the home and equipment used in the business is
deductible. If you sell your home after taking a business deduction on the depreciation,
you must recognize any capital gain or loss on that business portion regardless of whether
you buy another home or not.
All expenses listed above are subject to the income limitation (no loss for tax
purposes) as mentioned.
A useful IRS publication, No. 587 entitled "Business Use of Your Home," is
available. Anyone considering taking home business deductions should obtain a copy by
calling the IRS toll free number at 1-800-829-1040 or talk to an accountant for up-to-date
information or check the IRS website at http://ftp.fedworld.gov/pub/irs-pdf/p587.pdf
Income and expenses of a home-based business are reported on schedule C (Form 1040).
Supporting schedules for depreciation, self-employment tax (social security), etc. may
also be required.
Licenses, Permits and Zoning
Federal, state and local governments regulate and tax businesses for several reasons,
such as raising revenues, protecting the public from dangerous substances and fraud, and
protecting businesses from unfair or illegal competition. If you are starting a business,
you will want to determine in advance the licenses, permits, filing requirements and taxes
required by various agencies. It can be very frustrating when trying to purchase supplies,
applying for a loan, or filing a tax return, to find out that you need some type of
business permit or I.D. number.
Some of the more common requirements needed in North Dakota are a sales tax permit for
retail sales from the state tax department, operating licenses by type of business, and
registering trade names and filing articles of incorporation with the secretary of state.
Additional requirements which may be in effect if employees are hired include: obtaining
an employer identification number from the IRS, state and federal income tax withholding,
F.I.C.A. (Social Security) withholding tax, unemployment insurance and worker's
compensation. Information on the filing requirements and the names and addresses of
various agencies to be contacted in North Dakota are found in NDSU Extension Service
circular 752, "Business
Reports, Forms and Licenses Required in the State of North Dakota." New
Business Registration forms are available from the NDSU Extension Service, 4023 North
State Street, Suite 30, Bismarck, North Dakota 58501 or call 701-328-5134.
Many cities and counties have zoning ordinances that restrict certain business
activities (hazardous materials or products, etc.) to designated areas. There may also be
local guidelines regulating business activities, such as the use of advertising signs,
lighting, parking, etc. Town residents, especially, should know about local ordinances
before making any major investment in the business. In some residential neighborhoods, it
may be possible to have the area spot-zoned for your home business.
A zoning use permit is needed when making significant renovations or additions to your
home to accommodate the business (changing from residential to commercial use) or if the
commercial use of the building is changed. The permit is required so the building can be
certified safe for the operation of the business and the safety of your customers.
Building permits, especially in cities and towns, are required when erecting a new
building or remodeling an existing one. Local or state building inspectors should be
contacted to determine the building code requirements.
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EB-44, August 1999
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