Law For Small Business (Management 349) Home-Based Businesses (Chapter 14) Professor Charles H. Smith Fall 2011
Restrictions on Location of Home-Based Business • Two common potential restrictions; if either applies, then home-based business will not be permitted • Local zoning statutes – is home-based business permitted and, if so, to what extent? • Private land use restrictions (generally HOA CC&R’s but can be lease or deed) – may operate to restrict or even prohibit home-based business even if permitted by local zoning statutes.
Local Zoning Laws • What are the local zoning laws? Different cities have slightly different standards; examples include • Fullerton – FMC § 15.17.030(M); see eleven of the basic Home Occupation Requirements at http://www.ci.fullerton.ca.us/depts/admin_serv/bus_reg/home_occupation.asp • Orange – OMC § 17.14.050, subd. I; Long Beach – LBMC § 21.51.235. • The overriding themes are keeping the home-based business quiet, unobtrusive and small. • How to find out what the local zoning laws are? • Should be in the city’s code, which can generally be found on the city’s website or other Internet source. • How to deal with local zoning officials? • Have the spirit of compliance and teamwork (see prior PowerPoint presentation re Licenses and Permits).
Private Land Use Restrictions • Usual private land use restrictions in form of HOA CC&R’s, which are part of or referenced in deed to real property. • Lease may also restrict/prohibit home-based businesses. • Even a deed to land (with no HOA) may limit the use of the land though this is rare.
Insurance • Beware – your homeowner’s policy very likely will not cover business-related losses • Homeowner’s policy intended to cover losses related to “personal life” only. • Also, if business is separate legal entity (e.g., corporation, LLC, partnership), no coverage under homeowner’s policy even if business-related losses covered • Avoid this issue by having business named as an additional insured. • To avoid problems, ask agent for CGL policy or other specific coverage for the business.
Qualifying for Tax Deduction re Home-Based Business for Business Owner • According to http://www.irs.gov/pub/irs-pdf/p587.pdf (pages 2-6; note that this is a 36-page document so do not print the whole thing), to qualify for deduction of expenses related to the business use of your home, you must use part of your home • Exclusively and regularly as your principal place of business, • Exclusively and regularly as a place where you meet clients, etc. in normal course of your trade or business, • In the case of a separate structure which is not attached to your home, in connection with your trade or business, • On a regular basis for certain storage use, • For rental use, or • As a daycare facility.
Additional Tests for Tax Deductions re Home-Based Business for Employee • According to the same website (pages 2-3), must meet the previous requirements plus • Business use must be for your employer’s convenience and • You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.
Calculating the Home-Based Business Deduction • Use “any reasonable method” but two common methods (same website, pages 6-7) are • Divide the area used for business by the total area of your home. • If rooms all about the same size – divide the number of rooms used for business by the total number of rooms in your home.