Making It Legal:

I am not a licensed accountant (nor do I play one on TV), but IRS rules exist in a weird twilight zone between accountancy and law. The Internal Revenue Code is, after all, a law, promulgated by legislators. But most legislators probably don’t have the background or knowledge base to be mucking about in this area . . . which is why the code is such an incomprehensible behemoth to all but the most sophisticated of those who know how to play its game.

Nonetheless, here are some tidbits about taking a home office deduction that I just learned . . . so I thought I’d share:

The home office deduction sounds like it would be a great thing for small business owners. After all, many of us work at home, and it’s not as though the IRS is always so generous when it comes to deductions for the “little guys.” Deducting a portion of rent/mortgage interest, utilities, insurance, repairs, etc., is a very delicious prospect.

However, there’s a catch (you knew there would be, didn’t you?).

• The part you are deducting must be used exclusively for a trade or business. Not occasionally, or even often, but exclusively. That’s why it’s such a red flag for auditing the tax returns for small business owners.
• The home office must be the principal place of business for your company. Not the place where you bring your paperwork after a busy day in the office because you won’t be interrupted by annoying phone calls. If there’s no other location where you can handle the administration or management of your company, your home office may very well qualify.
• [And this is the new morsel I learned] If you deduct home office expenses, you may not get the full benefits of the tax exclusions when you sell your residence. Carving out a portion of your home for the business deductions in effect disqualifies it from the deductions you get from considering it part of your residential property.

Like most IRS rules, the home office deduction can be laden with traps for the unwary. Speak to your accountant to see whether it really will be worth your while to claim a home office deduction. You may find that the headaches of segregating your space for home/business use may be too great for the risk of getting flagged . . . or that the tax benefits upon selling your house may outweigh what you could claim for the home office.

In these times of dire economic predictions, here’s a bold query from someone with a little too much cash on her hands. [And yes, I skipped "B"]

Q.: It seems as though the larger my company gets, the more profit we show and the more money I just hand away to the government. What are the best ways to use profit and avoid giving money to Uncle Sam?

A.: You have a few options at your disposal.

1. Earn less money. That way you’ll have less to pay Uncle Sam.
2. Cook the books. Like a reverse Enron/Bear Sterns/Madoff–you’re not trying to inflate how you account for profits on the books, you’re trying to deflate how you show profits. On a legitimate note, have a sit-down meeting with your accountant to ensure that you’re properly accounting for all income and expenses and using all of the appropriate deductions you’re entitled to.
3. Shift to a cash-only business. The upside: no corroborating records except for what you create. The downside: possible imprisonment for tax fraud and probable loss of customers who are trying to get business deductions based on what they paid you.
4. Become a philanthropist. Your company can get a tax deduction for the money it gives away to charity. You won’t see it in your pocket, but Uncle Sam won’t get it, either.
5. Win “Employer of the Year.” You could give generous bonuses to your employees. Your company gets the deduction, and the employees get hit with paying the extra tax burden to Uncle Sam (not you). But, like No. 4, you won’t see it in your pocket.
6. Lobby your legislators. There’s no question that small businesses are hard-hit from a tax perspective. Speak out on issues–get involved in efforts that seek to lighten the load that small businesses have to carry (especially while they’re busy bailing out big industry).
7. Thank your lucky stars. My grandfather used to say that he never regretted paying taxes because it meant he turned a profit. In this economic climate, consider the alternative. Your company could have stagnant earnings or be on the verge of bankruptcy. If, after paying taxes, you’re still left with cash on hand to put into your pocket, call it a good day and be grateful.

If I had a nickel for every time someone asked me, “I want to take someone else’s product and put it to a different use. Do I have to get their permission?” . . . well, I might still be writing this blog, but I’d be doing it from a beach in Bora Bora. It’s asked with the same (seemingly) innocent, wide-eyed pleading my little brother used when he was in his “I want a puppy” phase and a stray happened to wander into our backyard. “Can we keep him, Mom?  Please?  PLEEZ??”

Well, by gum, I’ve actually turned into my mother (”We mock the thing we are to become,” she used to say, quoting Mel Brooks) and the answer is a definitive “NO.”  Said with hands on hips and a stern expression to boot.

Unless . . . you want to build your business on a risky proposition that you just might fly under the radar and get away with it. But if you’re going to go into business with the intent that all you’ll do is fly under the radar, that’s not a very grand plan for a business, nor are the prospects for the future particularly bright. Because you might not fly under the radar and get caught for copyright or trademark infringement. And unless you have a spare $100,000 (or more) just sitting around with no meaningful purpose except to pay an attorney to litigate the issue, you could find yourself up to your eyeballs in lawsuits.

A better approach: Do some original thinking. Create your own product. Or legitimately license the product from the manufacturer. And speak to an attorney who knows your industry to make sure you minimize the risks involved.

Ah, youth. I wish I had been so motivated to change the world when I was a teen. I was more concerned with how geeky I looked in braces and participating in nerdy things like student government. Here’s how this week’s teen wants to make a difference:

Q: I am trying to start up a robotics business but can’t find investors. Probably because I am thirteen. Any advice? Also, how old do you have to be in order to start up a business?

A.: Yes (for those of you Wonderama fans) . . . but according to the law, they’re not considered mentally competent until age 18. That’s not a slap in the face of teenagers–some of whom are exceptionally bright and brighter, in fact, than some adults–it’s a recognition that the human body is still in its maturation stages. So right, wrong, or indifferent, the law has a cut-off point at age 18. Under 18, you need a parent or guardian to start a business, sit on corporate boards and enter into contracts on your behalf–you can’t do it alone. [OK, there are exceptions for organizations such as Girl Scouts, etc., but that’s beyond the scope here]. Savvy investors know this, which is why (among other reasons) they would never dream of having discussions with a 13-year-old without counsel, parents and/or other witnesses present.

From my dear colleague, Jennifer Schiff, comes this intriguing article on “Why now is the time to optimize and freshen up your website.”

It’s tempting to want to throw money at SEO specialists.  While I “get” the optimization thing, I have my niggling doubts as to whether the hordes who say they know the secrets really do.  Is SEO a magic bullet or snake oil?

That’s where small businesses need to be very careful in their agreements with these companies.  Ask for references (and check them!).  See what kinds of guarantees (or disclaimers) they put in their contract with you.  Make it very clear what they will be doing for the fee you’re paying them and whether this is on a project basis or will be an ongoing expense for as long as you have your website.

Oh . . . it’s not what you think it is. This week’s “T” word is TAX.

Q.: How do I file a business tax return if I am married? I am starting a consulting business (LLC) with my sister; however, I plan to get married in the near future and I am concerned about how owning a business will affect my tax return when my future husband and I file a joint return.

A.: When you file a tax return with your husband, you will report the income you earned from the LLC (and the expenses attributable to you) on your Schedule C. Your accountant can sort that out for you easily. A bigger issue is whether you have a business ownership agreement with your sister, and whether your husband will be entitled to your share of the business in the event of a divorce or your death. Especially with family and friends, these kinds of legalities cannot be taken lightly. Run–don’t walk–to a reputable business attorney to get these issues straightened out before your marriage, as you’ll also want to address them in the context of a prenuptial agreement.

Q.: I have a tax ID. number and I want to rent a space for my business, but I can’t afford a typical office space so I was wondering if it is feasible to rent a residential space for my business with my tax ID number. If so, what would I need to have in order to do so without much difficulty?

A.: Real estate is zoned for particular purposes. A landlord would not be allowed to rent you a residential space knowing you intended to use it exclusively for a business purpose. Your business tax ID number (also called an employer identification number, or EIN) is meant to help the business develop an identity (and credit) of its own. Rather than playing games with improper uses of premises, try investigating the many virtual office space/share office space companies that abound. You can probably find something a lot more economical than building out traditional office space.

A sad tale of woe crossed my desk.  Seems that, a couple of months ago, an unsuspecting entrepreneur from Mexico bought into a U.S. franchise to import products to Mexico. She sent her 25 percent deposit (many thousands of dollars) to reserve the franchise for her city, but the franchisor cannot get the documents that she requires to import the franchisor’s products. According to the agreement she signed, the 25 percent is nonrefundable . . . but can she recover anyway because the mistake was not her fault?

The short and obvious answer is: It depends.

Franchises are strange and furry creatures. They involve a lot of regulation and disclosure to establish them. They also require a certain degree of rigor in creating the business model to ensure consistency in the franchise results. Whether or not “Melinda” can recover her money depends on the actual wording of the franchise agreement. It also depends on the laws of the state that governs her agreement (often called “governing law” or “jurisdiction”).

Contract principles generally provide that if there’s a problem or mistake that the parties weren’t aware of at the time they signed the agreement, it’s not fair for one or the other to be SOL. Courts may allow the contract to be “rescinded”–like a “do-over” in kickball. Everyone goes back to where they were when they started–no lost points, no gained advantage. But now you have to factor in the cost of an attorney to bring this claim for you.

Because franchise laws vary from state to state, it’s always advisable to consult an attorney who specializes in franchises in the state where the agreement is decided. And do it BEFORE you sign the paperwork, so that you know the risks of getting involved in this venture, and what your recourse will be if problems arise.

The year is winding down, and it’s a good time to get a handle on your finances and tax situation. Here are few questions of a financial and tax nature that hearken back to that age-old advice:

Get an accountant!

Q.: What do I do with credit card finance charges, late fees and over-the-limit fees? And come tax time, how do I treat them?

A.: What do you do with finance charges? PAY THEM! If you are regularly running late in your payments or going over your credit limits, something is seriously wrong with your bookkeeping system. Get someone in pronto to look at your books and help you put a system in place (whether it’s online banking or something else) to avoid running late. You could be doing some serious damage to your personal credit situation. Your accountant will be able to guide you on how to book the charges and the debt.

Q.: Do for-profit owners receive salaries in addition to being able to receive profits generated from the business? I understand that nonprofit owners get salaries but are not able to get profits generated from the business.

A.: Yes, owners of for-profit companies can receive salaries in addition to profit distributions. However, you run into the issue of paying employment taxes depending on whether you take money from the company as salary or as a distribution. Your accountant can guide you regarding best balance for your tax situation. Nonprofit organizations are held to different legal and tax standards and rules, so you are right that they cannot receive the profits: Those are supposed to go to the programs or projects that benefit the group they’re trying to help.

The last time (and only time) I ever made my own clothing was in seventh grade “home ec” class.  I started with wild and totally unrealistic ambitions for making a three-piece suit of jacket, vest and skirt for myself (this was the late ’70s, after all).  I bought the Simplicity pattern and fabric, cut everything out, tried to follow the pattern . . . and I don’t even remember whether I finished the vest.  Nightmares of stuck sewing machines, off-kilter bobbins and seam rippers visited me regularly that semester.  I was relieved to have to move on to the cooking portion of the class, where at least we could make chocolate chip cookies.

Chocolate cookies have been a staple of my life ever since, but not making my own clothing (gotta delegate what you don’t do well!).  So I was intrigued by this question, which crossed my inbox:

Is it copyright infringement if I use commercially sold patterns to make clothing to sell?

And the short answer is: Yes. Commercially sold patterns generally permit you to make clothing only for personal use, not for commercial sale. Check the language on the packaging to see whether it limits your use.  If you’re planning to build a whole clothing line around a particular pattern, you might want to reach out to the smaller pattern companies to see if they will grant you a license to use the pattern in a commercial context.  Or make your own.