Know the Rules: Home-Based Businesses Strain to Comply with the Complexity of IRS Regulations

By McKanic, Arlene | Black Enterprise, December 2004 | Go to article overview

Know the Rules: Home-Based Businesses Strain to Comply with the Complexity of IRS Regulations


McKanic, Arlene, Black Enterprise


The rules and regulations that home business owners must adhere to are more daunting than ever. Particularly challenging are the tax regulations, according to Home-Based Business and Government Regulations, a report compiled for the Small Business Administration by Henry B.R. Beale of Microeconomic Applications Inc. At the federal level, IRS regulations penalize home-based businesses when it comes to deductions, while at the local level, zoning laws and other stipulations present significant barriers to entry. Having to comply with certain building, fire, and health codes can also burden home-based businesses.

Beale's report supports previous research published by the Office of Advocacy, which showed that federal regulations were more of a problem for the smallest businesses--those with fewer than 20 employees. Roughly 53% of all small businesses are based in the home. More than two-thirds of all small businesses are either sole proprietorships, partnerships, or S corporations. Ninety percent of home-based businesses have no employees and 77% have gross receipts under $25,000. Moreover, 52% of home businesses provide services; 16% are in construction; 14% are in retail trade; and the remainder are in areas such as finance and real estate, manufacturing, and wholesale trade.

State tax codes are often clearer than federal ones. State taxes don't apply to most home-based businesses and, when they do, they're fairly simple. However, home business owners spend about an hour a week on activities such as record keeping, just for the purpose of filing federal tax forms. Not only are the rules often hard to understand but some of the tax laws themselves are confusing. For instance, the IRS requires that a home-based business file income taxes, employee taxes and expenses, and depreciation. …

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