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By Beth Fitzgerald
“It is a wonderful experience to have your own business,” Abby Kohut said. “But you have to be aware that expenses creep up as the monthly bills come in.”
Entrepreneurs tend to underestimate how much things will cost, because “when you work for a company, your phone, cell phone, travel, electricity — they’re all paid for by your employer,” she said. One of the keys to managing a successful home office is figuring out when money should be spent, and when it shouldn’t, she said.
“I don’t need fancy technology — I have a small laptop I take everywhere — but I need really fast Internet access,” Abby Kohut said. “So we spend a lot of money on Internet access.”
Ken Kohut is a photographer in the digital age, so he doesn’t have a darkroom, and he photographs his clients at parties, bar mitzvahs and corporate events, so he doesn’t have a studio or showroom.
But photography requires “a major investment in equipment,” Ken Kohut said. “We didn’t sit down and create a budget for how much it would cost; I just gradually acquired more equipment as time went on.”
These days, Ken Kohut takes a different approach to the issue of equipment escalation: He does a cost/benefit analysis before embarking on a new area of photography. If the venture requires buying new equipment, he makes sure the investment will pay off.
The Kohuts, like thousands of other Americans who run businesses from home, enjoy the tax benefits of the home-office deduction. Basically, this involves taking the square footage of your office and calculating that space as a percentage of the square footage of the house, then deducting that percentage of your house expenses from your income.
Martinsville CPA Gail Rosen said “the home-office deduction is very good, because you are getting a deduction for things you are already paying for.” Among the eligible expenses: property taxes, homeowner’s insurance, heat, electricity, water, garbage, sewer fees, condo fees, mortgage interest and home repairs. Rosen said these deductions reduce all your taxes: federal, state, Social Security and Medicare.
If you’re paying 40 percent of your income in taxes, and claim $10,000 in home expenses, you’ll save $4,000 in taxes, “a significant savings,” she said. “You have to keep very good records to use the home-office deduction, but it’s worth it.”
Chris Hansen, president of the Home-Based Business Council, in Neptune, said the biggest challenge for an entrepreneur is covering basic living expenses during the lean months following a business launch.
“Your business may not show any results for the first six months,” he said. So, it’s essential to cut back on living expenses “to the point where you can live moderately well for 12 to 18 months. Otherwise, you may wind up giving up on the business just as it starts to show results.”
Entrepreneurs make costly mistakes when choosing the legal entity for their business — creating a corporation, for example, when a limited liability company is preferable, Rosen said. Another frequent failing: charging too little.
“Entrepreneurs will devalue their worth just to get a client,” Rosen. “Do a business plan to figure out what you need to charge to cover your overhead and pay yourself a reasonable salary — and if you can’t generate enough revenue, don’t go into that business.”
E-mail to bfitzgerald@njbiz.com
