Home Economics : L.A. to Seek Back Taxes From Residential Businesses
Small-business owners who cheered in November when the Los Angeles City Council legalized home-based businesses are stunned to find now that they may owe up to three years of back taxes.
Consultants, software programmers, writers and others who have been quietly working out of their homes will owe the back taxes plus interest when they apply for a home-business permit during an amnesty period.
If they don’t apply by June 5, they’ll owe even more--a penalty of up to 40% on the back taxes.
The amounts can add up. For example, a consultant in business for more than three years who grosses $30,000 annually would owe $670. After the amnesty period ends, the consultant would owe more than $900.
And forget about the tax collector overlooking the unwary or the scofflaw. City officials are backing legislation that would give them access to state income tax records that will help them track down individuals operating a business without a city permit.
“Does L.A. want to run the multimedia business out of town?” asked Becki Walker, an interactive media consultant in Venice. “Why wouldn’t I move to Santa Monica or somewhere else where I won’t be taxed?”
Walker, who paid only a nominal fee when she operated a home-based business in Santa Clara, said Los Angeles’ tax on gross receipts makes the city appear anti-business. She criticized city officials for failing to get the word out about the taxes. Neither she nor colleagues who operate home offices had heard about the license requirement, she said.
They are not alone. Only 250 of the estimated 20,000 or more home-based businesses in the city had registered by the end of March, officials said.
To increase awareness, the city is sending out notices in this month’s municipal services bills. Ads have been placed in business publications and notices mailed to neighborhood chambers of commerce and to business associations. And Mayor Richard Riordan and Councilwoman Laura Chick will hold a news conference in North Hollywood on Thursday to publicize the new regulations.
City officials say it’s only fair that home-based businesses be required to pay city taxes. The retroactive tax provision has long been part of the city’s general business tax regulations.
“We ask all our businesses to pay a business tax to contribute to the very expensive cost of running a city,” Chick said. “Just because a business is operating in a home does not mean it’s not a real business.”
Home-based business activists note that most cities nationwide do not require registration fees or require only nominal ones. And they say taxes on gross receipts are equally rare. Compliance with the Los Angeles laws may be lower as a result of the taxes, said Denny Harris, executive director of the Small Office/Home Office Assn., based in Reston, Va.
Paul Edwards, co-author of “Working From Home,” said the tax and penalties will create financial hardships for many businesses.
“This is just mind-boggling,” said Lynn Hoopingarner, a West Hollywood home-based business consultant who is active in the National Assn. of Women Business Owners. “Now [home businesses] have to retroactively pay taxes for benefits they were not eligible for before?”
About 70% of the more than 500 California cities have home-based business ordinances, said Ernest Silva of the League of California Cities. Fees range from minimal filing costs of $50 to taxes on gross receipts, Silva said.
In Los Angeles County, at least 13% of the 77 municipalities that had home-based business ordinances in 1994 imposed a gross-receipts tax, according to a survey conducted by the office of Assemblywoman Debra Bowen (D-Torrance).
Chick labored for two years to get legal recognition for home-based businesses, one of the fastest-growing segments of business in the country. Before March 5, when the law went into effect, home-based businesses could be shut down and the owners prosecuted if neighbors complained to the city.
Opponents to legalizing home-based businesses had argued that small firms would reject commercial business districts in favor of cheaper home operations. They argued that the peace and quiet of residential neighborhoods could be ruined.
Imposing the taxes and penalties eliminated one of the advantages of operating a home office and removed political objections to legalizing home-based businesses, Chick said.
Home-based businesses are taxed on their annual gross receipts--as are all businesses in the city. The rates vary according to which of 40 business categories a company falls under. In all categories, however, the rate comes to less than 1% of gross receipts.
The tax is structured so that no matter how few dollars a company earns, it still must pay a minimum tax ranging from $75 to $145.
This assessment hits small businesses and those who operate part time especially hard. Independent contractors or salesmen who sell products for another company are among those required to get a city business licenses, if their parent company doesn’t pay for them.
Further, Los Angeles’ army of income-producing magazine and newspaper freelance writers, screenplay writers and book authors would also, for the first time, need a business permit.
The mayor’s office is conducting a tax equity study and could recommend changes in the law. Meanwhile, the June 5 amnesty deadline will remain in force. City officials say they will be looking for operators of unregistered home-based businesses as they do for any other kind of unlicensed business.
Since January 1995, the city has recovered nearly $15 million in overdue business taxes from unlicensed companies. Mosaix, a Redmond, Wash., tax-search company hired by the city, uses computers and software to compare the city’s list of business names against the names in fictitious business license lists, state corporations’ files, yellow-page directories and membership lists of various professional associations.
The search for unregistered home-based businesses would be stepped up if AB 701 becomes law. The bill, introduced Feb. 26 by Assemblyman Louis Caldera (D-Los Angeles) with the support of Riordan, would enable any city to review personal state income tax records.
The state is now prohibited from providing that information because of privacy considerations, except in child-support cases. The bill, which so far has garnered no opposition, is expected to pass this year and go into effect in January.
The city’s Web site provides more information on the home-occupation ordinance at https://www.ci.la.ca.us
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The Home Business Tax
Under a Los Angeles ordinance that took effect March 5, owners of home-based businesses must register with the city clerk’s office and pay a tax. Businesses that have been operating in residential areas without a license must pay any past-due city taxes plus interest for up to three years. Penalties will be waived only until June 5 during a tax amnesty period. Here’s a guide to the new fee and the penalties for nonpayment:
THE TAX
If you’re a home-based business owner, here’s how to figure the amount you owe annually. Begin with the $25 registration fee. Then, figure out in which category your business belongs. Based on the past year’s gross receipts, add the minimum tax plus the amount you owe for every $1,000 in receipts above the minimum.
Home-based businesses are expected to fall mainly under five of the city’s 40 business categories, with the following basic rate schedule:
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Registration Category fee Min. tax Tax per $1,000 Min. total Misc. services $25 $49.67 $4.14 after $12,000 $74.67 Multimedia business $25 $118.25 $1.18 after $100,000 $143.25 Professions and occupations $25 $106.43 $5.91 after $18,000 $131.43 Retail sales $25 $110.86 $1.48 after $75,000 $135.86 Wholesale sales $25 $118.25 $1.18 after $100,000 $143.25
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THE PENALTIES
If you’ve been in business before and haven’t paid city business taxes, you may owe for up to three years. Here’s how you compute your penalties:
If you pay before the tax amnesty ends June 5, you will owe the $25 registration fee, taxes for each year in the past based on the previous year’s gross receipts, a 3.75% surcharge on the taxes owed, plus interest on the total taxes.
If you pay after the June 5 amnesty period ends, you will owe all of the above, plus a 40% penalty on the past taxes owed.
THE EXAMPLES
The Basic Formula
$25 Registration + minimum tax + tax per $1,000:
Example: A writer working from home earning $30,000 annually would pay:
$25 (registration) + $106.43 (min. tax) + $70.92 (tax per $1,000) = $202.35 annually.
Registering During Amnesty
The same writer in business for 10 years and registering in April would pay one year’s registration, plus 1.25% interest monthly on the delinquent amount cumulative for the past three years:
$25 (1 year of registration) + $552 (3 years of taxes, including surcharge) + $96.60 (1.25% interest) = $673.60.
Registering After Deadline
If that writer misses the amnesty deadline, he or she would pay one year’s registration plus a 40% penalty in addition to the fees above:
$25 (1 year of registration) + $552 (3 years of taxes, including surcharge) + $117.30 (interest @ 1.25%) + $220.80 (40% penalty on taxes) = $915.10.
