Starting a home business can be one of the best ways for you to achieve the job satisfaction that everyone wants but few obtain. Working from home is not only an ideal way to spend more time with your family, but it also helps the environment by reducing traffic and pollution. Moreover, enormous advances in technology have made start-up costs much less prohibitive for budding entrepreneurs, which is why many have turned to the home as a means to grow their businesses.
Growing a home business, while exciting, introduces new challenges that must be met in order to obtain the success you desire. Unfortunately, the comfort of working from home often leads to poor organizational habits that can cause serious problems down the road, not only by adding unnecessary stress to your workday but also by damaging your bottom line. Learning to keep the “home” out of your home business, then, is essential if you want to achieve satisfaction and a steady profit.
The Home Business Motto
“Keep it separated,” should be the motto for all home business owners, yet so many remain unaware of this basic accounting rule until the IRS comes knocking on their doors. While the IRS only has the resources to audit about 1% of individual returns each year, nearly half of all the “red flags” that increase the chance of receiving an audit are small business-related, such as claiming a home office and deducting 100% of a vehicle for business use. Keeping these expenses separate from your personal life will make them easier to prove during an audit and save you money on accounting fees.
Customers also greatly appreciate doing business with a company that provides excellent service. For instance, 78% of U.S. customers surveyed by American Express in 2011 claimed that they did not complete a purchase due to poor customer service, and 70% stated that they would spend more if a company provided them with a great experience. Customers hate dealing with companies that are slow to process an order or have trouble responding immediately to a complaint, which is why keeping your home business organized and separated from your personal life will help prevent these unnecessary delays.
Five Separation Tips
Figuring out how to untangle the clutter of your home and business life presents a challenge if you are inexperienced, but here are a few essential tips that will significantly improve the way your home business operates:
- Open a Business Banking Account
One of the easiest ways to track your business income and expenses is to open a separate bank account. Not only will this make processing tax returns less stressful for you or your accountant, but it will also lend credibility to any business deductions that you want to claim. In addition, banks are far more willing to establish credit if they have access to financial records that clearly represent the financial health of your business.
- Create a Home Office
Creating a separate space for your home business will not only help you remain organized, but it can also lead to substantial tax savings. A home office deduction can significantly reduce the amount of self-employment tax you have to pay, but the IRS has strict rules you must follow in order to qualify. Except for a few special cases, your home office must be used regularly and exclusively for business. Additional rules may also apply, which is why you will want to consult a tax professional to avoid placing yourself at risk of an audit.
- Maintain a Work Schedule
While a home-based business can reduce the start-up costs and overhead that eat into your profits, many new entrepreneurs struggle with maintaining the balance between their personal and professional lives in this setting because they can set their own schedules. Blending personal activities with the day-to-day operations of running a business might be tempting, but you will better serve your customers and improve workflow by keeping consistent hours.
- Track Equipment Usage
Ideally, any equipment you purchase should be used exclusively for business purposes, but adequate space and funding can often get in the way of this objective. For example, an entrepreneur interested in starting up a home-based medical billing and coding small business might use a single computer for both business and personal activities to cut costs. While the IRS allows this, only the portion used for business is deductible, which means keeping a detailed log as proof is necessary.
- Form a Separate Business Entity
About 72% of small businesses in the United States are run as sole proprietorships because they are easy to form and can be reported on a personal tax return. While this reduces the amount of paperwork you generate, there may come a point when your home business needs investors and legal protection from creditors. Forming a separate business entity such as an LLC or an S Corporation can provide these benefits, though you will want to speak to an attorney and a financial advisor to see if this is right for you.
Although keeping home and business separate in a home business can get complicated at times, it is one of the most important ways to secure your financial well-being.
Brandi Tolleson is a successfully self-employed freelance writer and tax accountant residing in Whittier, CA.