* Home businesses are the secret weapon in the U.S. economy - no thanks to antiquated local and IRS rules
Home-based businesses serve as vital kindling for the U.S. economy and account for more than half the nation’s small-business population. So why does the IRS hate us? And why are many of us still vulnerable to grudge-bearing neighbors, who can use obsolete zoning regulations to shut us down?
The U.S. Small Business Administration’s Office of Advocacy recently released its annual report, “The Small Business Economy, 2004.” Among the highlights:
* Home-based businesses make up 53% of the small business population and serve as incubators for many growing businesses.
* Nevertheless, these businesses face a unique regulatory environment that can restrain their expansion and growth.
According to the report, the unique (that’s “onerous” to you and me) regulations come from two major sources: the IRS and local municipalities.
Locally, “zoning tops the list” of troublesome regulations, says Joanne H. Pratt. principal of a Dallas consulting firm. Pratt has studied small-business trends for 25 years and helped write the SBA report. You may not even know it, but depending on what industry you’re in, your town may have on the books zoning laws “that, if enforced, could be used to close down a business the next day,” Pratt says.
Most of these zoning regulations were drafted when industry was loud, dirty and exploitative. Statutes limit the number of deliveries you can accept, the number of cars that can park in front of your house and are seldom enforced unless neighbors complain. If you’re feuding with a neighbor, you might find yourself ratted out and blocked from transacting business.
Because most of the laws are obsolete, “You’d think they’d be easy to change,” Pratt says. “But they’re not.” To affect change, individual small-business owners must petition local government – which in turn would increase their visibility and the odds they’ll suffer a zoning-related shutdown. Unfortunately, there’s no way to change zoning laws at the state or national level; they are by nature local.
It’s difficult to see a movement toward more rational zoning laws anytime soon. But how about the IRS? One of the staggering findings in the SBA report is that even the simplest home business proprietor spends an average of 89.5 hours annually on tax-related tasks, 74% of which is devoted to learning tax laws and keeping record – even though most I know, at least, use an accountant.
The SBA report and Pratt are especially critical of the IRS code that lets filers claim home-office space as a deduction only if that space is used solely for business. “This just makes no sense,” Pratt says. “Do you know any [home-based business owner] who doesn’t use the office for both work and personal stuff? Of all the regulations that ought to be changed, that one is tops.”
The report cites other silly or punitive IRS provisions as well – don’t get me started on the double FICA hit that we self-employed folks face – and is worth a read.
But there’s reason for hope, I hope; events political might be in our favor. The SBA report makes it clear that congressional shenanigans are responsible for much of the illogic in the present IRS code. Shortly after his reelection, President Bush called tax reform one of his top priorities. Between that determination and a substantial Republican majority in Congress, should home-based businesses look for a more rational tax code, perhaps as soon as 2005?
When I put the question to Pratt, she laughed a gentle humor-the-naïve-fellow laugh and said, “I’m not holding my breath.”
