Fred Dunayer: Welcome to the SCORE Small Business Success Podcast, Been There, Done That. To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245. Now, here’s your host, Dennis Zink.
Dennis Zink: Episode No. 28, the home-based business. Fred Dunayer joins me today in our studio as co-host, SCORE mentor, and our audio engineer. Good morning, Fred.
Fred Dunayer: Good morning, Dennis.
Dennis Zink: Fred, our guest today is Janet Shellenberger. Welcome to “Been There, Done That,” Janet.
J Shellenberger: Good morning, Fred and Dennis. Thanks for having me today.
Dennis Zink: Janet owns and runs a home-based accounting and tax preparation business in Clearwater, Florida, which she started in 2001. In the 80s, she worked out of her home as an employee of a large computer manufacturer. Later, as an IT manager, she was chartered with running a test to move many of her direct-report employees to home-based offices. She has been a SCORE mentor for seven years, a workshop presenter, and a past chapter chair. Her BS is from the University of Missouri and her MBA is from Florida Institute of Technology.
Janet, the number of home-based businesses has grown dramatically over the last 10 years. What’s the current status of home-based businesses?
J Shellenberger: Dennis, you’re actually right. The number of businesses have went through the roof in the last 10 years. Today, there’s 38 million businesses that are home based. That is one in every eight homes has a home-based business in it. They generate $427 billion in revenue.
Who runs these businesses? Sixty percent of them are run by women and 55% of them are run by veterans, 37% of these businesses are run by people 55 years and older, 63% of the businesses are service-based businesses, the second highest is construction at 16% of businesses, and finally, after three years, 70% of these businesses are still running. You can see, this is a huge industry today.
Dennis Zink: If I’m interested in doing that, what do I need to consider before starting a home-based business?
J Shellenberger: The first thing you have to look at is yourself. Do you have the skills and the aptitude to run a home-based business? Some of the questions you might want to ask yourself is, do you have the discipline to run yourself, to manage yourself both personal time and business time? One of the biggest things that you have to consider is the separation of your business from your personal aspects.
Do you have the focus and can you ignore your distractions at home? Do you have a separate space for your business? Are you accountable? Can you spend your time wisely and effectively? Can you report to management? Can you make connections? One of the biggest things about a home-based business is solitude and separation that you have, so you need to manage to be able to make connections in your industry.
Have you planned a home-based business adequately? By that I mean, have you set work hours? Have you designated a space and are you going to utilize it, and report your time? Have you got your family buy in for the home-based business and the support of your family and friends? Finally, figure our what motivates you. Decorate your office with things that will motivate you, and ideas and actions that are going to help motivate.
Dennis Zink: You mentioned management, are you referring to people that have started the business and it’s in their home, or could it be that they work for a company and they are operating out of the home?
J Shellenberger: I’m referring to both, a person that has started a business or is thinking about starting a home-based business, and someone that works out of their home. I have experience with both. I’ve worked for a business where I was working from home. I was also managing employees that work from home. Then, I also, at this point in time, I have my own home-based business that I run and operate, so this dialogue applies to both.
Dennis Zink: We have at SCORE a lot of clients that come in that want to start a business and they really fit this mold. They’re interested in the home-based business and at least that’s how they start. Eventually, they might migrate to an office if they need to. If you could, comment on some of the other factors that should be considered in starting a home-based business.
J Shellenberger: When you’re starting a home-based business, the first thing you need to look at is do the self-assessment that we just talked about. Then, you have to look at your environment. You want your environment to be as professional as possible.
I have an example of an employee that worked for me that worked from home. She had three children. When we moved her to her home, we weren’t sure how this would work out, but she decided she was going to focus on her business. This is her number one priority during the daytime.
She separated her business from her personal. She would take the kids to daycare every day. It didn’t matter whether she was working at home or with clients, she would make sure that the children were at daycare. She would not answer the phone if she was on a conference call with somebody. She refused to answer the door if the doorbell rang. She would report to management twice a week on a scheduled basis.
She operated it as professional as possible and that’s what you need to do when you start your home-based business, too, is look at operating at a professional and how do you look to your clients.
The second thing you need to consider is, do you have the space to dedicate to your office or storage? When I started my home-based business in 2001, I have an accounting and tax business. I didn’t even think about storage at that point in time, but since then, the IRS has required that we keep all the signed documents that people sign for their tax returns, so storage has become a huge issue and something that I’ve needed to really look at and figure out how to manage in my business. It would have been a lot easier if I would have been able to do that upfront.
In addition, when you’re looking at your environment, do you have the equipment or can you acquire it for your home-based business? Most home-based businesses need a chair, a desk, a computer, a file storage, guest furniture, a phone, a land line is best. It sounds more professional than a cellphone … Internet access, software for your business, virus protection, applications, office applications, and possibly accounting applications, a printer or a multi-function for scanning and faxing, and printing, and a computer and monitor. These are the basic items most home-based businesses needs.
Dennis Zink: That’s a lot of equipment. Have you put a price tag to that?
J Shellenberger: Yes, all those pieces of the equipment run about $1,000 if you buy then new, so it’s not really expensive to get started in a home-based business which is one of the advantages. Another thing you need to consider with your environment is, do you meet with clients in your home?
I know when I started meeting with clients in my home, I didn’t think about privacy, but that’s one of the things that I’m concerned with every time I meet with a client now. Offering during tax season we might have three different clients in our home at the same time, and I make sure that I keep them separated so that they cannot hear what we’re talking about to the other client. Privacy is an issue you need to think about.
Another environmental aspect is your home zone. You need to check with your city to see if you can have your business in your home and is your family on board is the last and most important aspect.
Fred Dunayer: One thing that I know that some home-based business do is if they have to meet with clients, they may use a temporary workspace. I know that for example, we use one for when we have client meetings that you basically pay a monthly fee and you can use a conference room whenever you want to. If you don’t want to bring clients into your house, maybe I think there’s some homeowner associations that allow you to have a business out of your house as long as you don’t have clients come to visit, so that is an option.
J Shellenberger: That is a really good option and something that a lot of home-based businesses look at because it’s another way to look more professional. You can have your post office box or your mailing address at that facility. You can make phone calls and have phone calls received by that facility, and you can do all this. Some places would allow you to do this for $30 a month which is a very reasonable rate.
Dennis Zink: Absolutely.
J Shellenberger: Another thing you need to look at when you’re considering a home-based business is insurance. Every business has different insurance needs, and so I recommend that you check with your insurance agent and find out what insurance you need. Liability, errors and omissions, auto insurance, home insurance to cover your business, inventory insurance, media insurance if you’re online business, these are all the types of insurance that needs to be considered.
Dennis Zink: Janet, are there other effective ways to separate the business from your personal life?
J Shellenberger: One method that you can use for separation is called time-boxing. This is a project management approach. This is where you set aside a timeframe to work on each task.
For example, I was preparing for this podcast and I set aside 9 to noon. Then, I had decided I want to reward myself for finishing the tasks, so at noon, which is typically my lunch hour, I would go for a bike ride once I finish the task. That works for a lot of people. It keeps you focused. It keeps distractions out and it helps you to complete your task while you’re working.
People are a harder to work within task for time-boxing because you might meet a client and that meeting may go longer than expected, but you can do this by setting aside longer time frames for your meetings with people.
Dennis Zink: Janet, what are the steps I need to take to register a home-based business?
J Shellenberger: Registering a home-based business is similar to registering any other business except there is one additional step. The first step you want to take is determine your business entity, whether you’re going to be sole proprietor, an LLC, a partnership, an S-corp, or even a C-corp.
Dennis Zink: Would you normally talk with an attorney for that?
J Shellenberger: No, I would not. You can go to an accountant. You can do this yourself. Go to the state website or you can go to SCORE. I recommend talking to somebody to help you determine your business entity and look at the advantages and disadvantages of each one. You don’t need to go to an attorney for this specific thing or you don’t even need to go to an attorney to start your business.
Once you decide what type of business entity you’re going to be, you can select your name for your business and do a name search. You can do a name search in the state of Florida at sunbiz.org. Each state has its own name search location.
The next step would be to register with your state. This depends upon your entity and the state, but typically costs $75 to $200. This is the only fee. If you’re doing this yourself, this would be the only fee that you would be responsible for paying in the process of setting up your business.
Then, once you register with your state, you want to register with your state for employee and re-employment tax purposes. The state would provide you a tax ID number at this point in time.
The next step is once the state has approved your business, you want to go to the IRS at www.irs.gov and obtain an EIN (Employer Identification Number). You can do this online. You can search irs.gov, do a search on online EIN –
Dennis Zink: That’s employer identification number for clarification?
J Shellenberger: Yes, employer ID. It’s also known as a tax ID number. There is no charge for this. I’ve had clients that have come back and told me that they paid $100, $200 for the EIN. There is no charge. Somehow they got into the wrong location on the website. Do not pay a fee for this if you’re asking for that.
The next step would be as if you’re an S-corporation, you need to file a Form 2553 with the IRS. Again, there is no charge for that.
Finally, you need to obtain your city license or permit. This is called a business receipts tax and it’s obtained from your city. It used to be called an occupational license in the past, but they’ve changed the name of that. This step is the only step that’s unique to a home-based business, is obtaining the city license.
Then, finally, what I tell all my clients is to get a bank account with a credit card or debit card in the name of the business. This will help you keep your expenses and income separate from your personal income and expenses.
Dennis Zink: Can you explain what Form 2553 does?
J Shellenberger: 2553 is an IRS form that tells the IRS that you are electing to be an S-Corp. When you file for your EIN, you specify that you’re going to be a corporation, but you don’t specify whether you’re going to be a C-corp or an S-corp. Therefore, the IRS assumes it’s a C-corp until you file the 2553.
Dennis Zink: You have a certain amount of days to file that?
J Shellenberger: Yeah, you have two and a half months to file that form.
Dennis Zink: So, 75 days is right?
J Shellenberger: Seventy-five days, perfect.
Dennis Zink: In addition to that, are there any other steps that you can take to do the registration, for example, online perhaps?
J Shellenberger: Sure, there’s a couple other ways. You can do it yourself and I encourage people that are computer literate that feel comfortable to do this themselves. However, if they don’t feel comfortable at going through these steps, they can hire somebody. They can hire an accountant to do this or online, there are several services available that will help you do this. One is LegalZoom, for example.
If you’re hiring an accountant, you should expect to pay $75 to $200 for the service in addition to the state fee of registering with your state. You do not need to use an attorney for this. Attorney fees are quite bit higher, but you do need to use a reputable accountant if you’re going to hire somebody.
If you choose to use an online service such as LegalZoom, you want to make sure that you complete all the steps. Quite often, they will produce some of the steps for you, but then, they’ll send a letter outlining the rest of the steps that need to be completed.
I had a physician that was setting up his own business and he used LegalZoom to do this, and he got the letter from LegalZoom of the remaining steps he needed to complete, and one of those was to file a 2553 to be an S-corporation. He set that letter aside and didn’t pay attention to it, and assumed that everything was done to set up is business.
He contacted me about six months later because he had got referral to me, and assumed that his business was set up an S-corp, but in reality, because he didn’t follow the steps and finish the process, he was really a C-corp. It took a lot of work to get that changed with the IRS.
Dennis Zink: Now that I have started my own business, what are some of the advantages?
J Shellenberger: Flexibility is one of the top advantages. 61% of the home-based business owners say that they love the flexibility and that’s one reason that I became a home-based business, is because I enjoy the flexibility of my time. I may choose to work in the morning and in the evening, and take the afternoon off for fun things to do, but that’s my choice.
Second big advantage is time with the family. 46% of the home-based business owners say that they have more time with their family. That’s because they don’t have to commute to work or the extra time of taking breaks and lunch breaks. No commuting saves time and money for home-based business owners.
Having a home-based business is low-cost and low-risk. Home-based business can be set up for well under $1000. Finally, another big advantage of a home-based business is a tax deduction you can take for your home office expense.
Dennis Zink: What are the requirements to take a tax deduction for a home office?
J Shellenberger: The IRS says that your home office must be used exclusively and regularly as your business. It has to be a principal place of business or a place you meet and deal with clients. What did I mean by exclusively? A home-based business must be a location used exclusively. By that, they mean that your space, your home office, must be used only for your business.
For example, I have a bedroom that I’ve converted to an office and I use that exclusively for my business, and that can be used as a tax deduction or as an expense for my business. I also use the kitchen table to meet with clients and because I use the kitchen table for dinner and lunch, and breakfast, it’s not used exclusively as an office for my business, so I cannot deduct that space.
You don’t have to have a separate room to use it as a tax deduction. You can use a portion of a room and even if it’s a small corner with a desk, as long as you use it exclusively for your business, you can claim that as a tax deduction.
Dennis Zink: How do you compute that? Do you look at the square footage and divide it by the total square footage of your home and then that percentage your mortgage or rent? How do you figure that out?
J Shellenberger: That’s a good question. Right now, there’s two ways that you can figure that out. One is it’s prorated for the space. For example, if you have a home that’s 2000 square feet and you have an office space that’s 100 square feet, that’s 5% of the home is your office space, and so you can take all the expenses associated with the home, the insurance, the rent, the interest on your loan, the utilities, repairs and maintenance, the security system are some examples.
You can take those expenses, add them all up, and then, take 5% of that, and that is the tax deduction you can take or the expense that you can take on your business for the home office.
Another way. The IRS in the last two years has simplified this and as a result, they also say that another way you can do this is take $5 a square foot up to 300 square feet, so you can take a maximum of $1500 per year as a home office expense.
There are some advantages and disadvantages to each of these. I’d suggest that if you’re looking at this, you might want to talk to an accountant to understand the advantages and disadvantages.
Fred Dunayer: I do recall from a podcast we did previously that when you go to sell your home, some of that is recaptured. I think the phrase is recaptured where you actually pay a little bit extra in your income from the sale of the property because of the deductions you’ve taken previously.
J Shellenberger: That’s absolutely right, Fred. If you have a home office and you’ve depreciated your home as part of the home office expense and taken that expense as a deduction, then, when you sell your home, you do have to recapture that depreciation expense and you’re made to paid taxes on that.
Dennis Zink: What are some other tax deductions that I can take with a home-based business?
J Shellenberger: Some other tax deductions you can take with your home-based business is the equipment that you purchased for your home-based business; computers, software, furniture, these are all depreciable, but if you purchase these as new equipment for your business, you can depreciate it the first year which is a special depreciation called Section 179. If it’s used, if you purchase it as used equipment, then you have to depreciate it over multiple years.
Other expenses you can take are office supplies. Your phone, you can take the second line of your phone as a business deduction. What we mean by that is the IRS says that they expect everybody to have one phone line for personal reasons, so if you only have one phone line and you use it for your home and your business, you cannot deduct it, but if you have a second line, a cellphone, you can deduct that.
Any tools that you purchase for your business are depreciable and can be subject to the 179 depreciation which means you can depreciate it all the first year. Work related education, storage facility rent if your renting a storage facility for your business, any cost of the start-up of the business up to $5,000, so that state fee that you pay to register your business, the business tax receipts that you have to pay the city for your business, those are all deductible.
Another large deduction that you want to certainly consider is your mileage or auto expense. In terms of using your car for your business, you can take either a mileage expense this year, it’s 57 and a half cents a mile that you get or you can deduct the actual cost of your vehicle.
Again, that is prorated based on your personal use and your business use. If you use your vehicle 50% for personal and 50% for business, 50% of all the cost of maintaining your vehicle and the insurance, and the fuel that you buy for your vehicle is deductible.
Dennis Zink: In your experience, is it just easier to use the mileage deduction or does it really pay to add everything up and figure out what it costs?
J Shellenberger: That’s a really good question. I have a lot of clients that will bring me both, data for both, and 99% of the time, they get a higher deduction by taking the mileage which is 57 and a half cents a mile plus it’s a lot easier.
Now, your car, you definitely want to keep a log of your business miles, so you want to keep a log of the date, where you went, how many miles you drove, and the purpose of the meeting or the mileage that you drove for your business because the IRS will ask for this if you ever get audited.
Dennis Zink: Is there some point in time that I should move my office outside my home as I grow?
J Shellenberger: Yes, you might want to consider moving your office as you need to hire employees. If you have to hire employees that need to work near your facility or in your facility, you would want to consider moving it outside your home for that reason.
Another reason to move your office outside your home is if you want or interact with others. You might be lonely working at home or not be able to manage your time, so you can boost your productivity by moving to an office outside the home.
Finally, if you’ve outgrown your space at your home and have no more space, you might want to consider moving to an office.
Fred Dunayer: I know that working out of my home office, I tended to more networking, to go to more networking events and to do things like that in order to have more social contact, and for marketing purposes. Marketing out of your own home is a little challenging.
J Shellenberger: Yeah, that’s an excellent way of getting out to meet other people in your industry and other people that are home-based businesses also, and get new ideas and ways to be more productive in your business.
Fred Dunayer: My biggest question is how do you make it so that it is not inevitable that when you’re on the phone with a client, that somebody comes to deliver a package and the dog starts barking, and somebody starts yelling, and it just becomes a very difficult professional situation.
J Shellenberger: That’s a real example and we hear this happen every day. I tell you, when that happens to me, first of all, when I’m talking with a potential client, I will tell them upfront that I work out of my home and that I’m willing to meet them wherever it’s convenient for them, whether that’s their home, their office, Starbucks or Panera Bread, a library, or my home.
Fred Dunayer: Is there anything that we either haven’t talked about or maybe one thing that you would like our listeners to come away from this podcast at the top of their mind?
J Shellenberger: The things is, if you’re going to start a home-based business, you really need to separate your business from your personal aspects. That’s the number one thing and the number one thing that makes home-based businesses successful.
Dennis Zink: Janet, thanks for enlightening us on home-based businesses today and being a guest in Been There, Done that.
J Shellenberger: Thank you.
Fred Dunayer: Thank you.
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