From the September 2004 issue of Startups

Antiquated tax regulations and zoning laws have prohibited or severely limited homebased business for the past two or three decades. However, the tide is starting to turn. A friendlier regulatory climate for homebased entrepreneurs is on the horizon, experts predict.

"Many of the laws on the books are outdated, written at a time when the majority of people went to work at major corporations outside the home," says Jim Blasingame, host of weekday radio talk show The Small Business Advocate Show and author of Small Business Is Like a Bunch of Bananas. "The laws have some catching up to do to reflect the new reality, which is that homebased business is a major growth segment for the economy. The good news is that legislators are beginning to realize this."

Chad Moutray, chief economist with the SBA Office of Advocacy, points out that "53 percent of businesses in the U.S. are homebased businesses. The explosion of the Internet has made it possible to do everything from home. Ten years ago, we couldn't even envision how this would change the economy or how great the pressure would be for regulatory change."

In February 2004, the SBA released a comprehensive study, Home- Based Business and Government Regulation, which found that homebased businesses are subject to a disproportionate number of both federal and municipal regulations. For instance, the study cites how federal regulations make it especially complex to claim a home-office deduction and how depreciation is spread over a longer period of time than for other types of offices. As for municipalities, the study points to the fact that many local zoning codes prohibit businesses in residential areas outright and that few local jurisdictions use different zoning categories pertaining to type and density, which would provide greater flexibility in homebased business regulations.

One state is on the forefront of change. The New Jersey legislature is expected to pass Bill A1118, sponsored by Republican Assemblyman Joseph Azzolina, which will exempt some businesses from seeking variances in residential zoning, making it easier to establish a low-impact homebased office. As of press time, the bill had not been scheduled for a vote.

Over the past decade, New Jersey has gained more than a quarter-million new homebased businesses, according to the Family Home Occupation Act, and this is fueling the momentum toward legislative reform favorable to homebased business.

"Local government is worried about transportation and environmental hazards in residential areas, and rightly so. This legislation addresses [these issues], excludes manufacturing and warehousing, and has a provision permitting municipalities to opt out," explains Alan Steinberg, the former executive director of the New Jersey Meadowlands Commission, currently serving as the SBA regional advocate for New Jersey, New York, Puerto Rico and the U.S. Virgin Islands. "This is common-sense legislation that reflects the economic changes that have taken place."

Other states are making inroads, too. The U.S. Chamber of Commerce Small Business Center reports that in California, Maryland and Vermont, legislation is being created to reform homebased business regulation.

"Across the country, there's a growing impetus to make these changes," says Steinberg. "It's only a matter of time."