Some small-business entrepreneurs are people who wanted to get out of the huge corporate environment. Others were laid off and couldn't find another job, or thought, ''Why not try what I've always been wanting to do?''
Whatever the reason, the growth of small business, with its major contribution to newly created jobs in the United States, ''is more than a trend, '' says David E. Gumpert of Harvard Business Review, ''it's history.''
Many small businesses are traditionally started in the home. What kind of tax breaks are available for these businesses?
The Internal Revenue Service starts out by saying you cannot take a deduction for a business use of your home, observes Katherine Klotzburger, president of Change-Agents Inc., a small-business consulting firm in New York. ''Then there are five exceptions. You need to decide up front which of these you will fit into.'' You can take the deduction if:
* Your home is your principal place of business. You can deduct only your ''primary workplace'' - but each business with a separate income stream can have a primary workplace. For example, Ms. Klotzburger continues, if you are a teacher you can't deduct the area in which you grade papers at night. But if you have a separate tutoring or other business not connected with your job as a teacher, you can deduct the costs associated with your workplace, and you can use that area to grade your papers from teaching.
* The part of your home you deduct is a place you use exclusively to meet clients, customers, or patients.
* It is a structure detached from your home, such as a greenhouse.
* You use your home as a licensed day-care center. You may deduct that portion of the cost of your home for the portion of time that you use it.
* A portion of your home is used to store inventory or merchandise.
This work area should be used ''solely and exclusively'' for business purposes, says an IRS spokesman. This means, with the exception of areas used for child care and storage of inventory, you cannot use home offices to write checks to pay your personal bills, or to hold a party. (In the example given above, the teacher can use the home office to correct papers from the regular teaching job because that is a business activity, though not an activity of the home-based business.)
Just rearranging the furniture can make a difference, Ms. Klotzburger explains. One tax deduction was disallowed by the IRS when the office furniture was scattered all over the living room. It must be clustered into a distinct ''office area,'' although it no longer must be partitioned off.
You should show, through detailed records and evidence of effort put into the business, that you intend to make a profit. If you don't show a profit two out of every five years, the IRS defines your business as a hobby, and disallows your deductions.
To figure your deduction, count up the square footage regularly used for business and divide by the total living area square footage, says Edward Pendergast, vice-chairman of the Small Business Foundation in Boston. You may depreciate this business portion of the cost of your house, less the cost of the land. The same percentage of your rent, real estate taxes, mortgage interest, home insurance, heating and electricity, and general repairs to the home are tax deductible. You may deduct all your business calls and a percentage of your basic phone service charge if you need the phone for business.
In 1983 the first $5,000 of business personal property such as a desk, files, or personal computer can be either taken off your business income as an expense, or depreciated, he adds.
Expensing is recommended for those in the higher tax brackets. Only that property used in your business or trade, as opposed to tracking your investments , can be expensed. If you buy more than the $5,000 limit, or the property is used to track investments, you may depreciate most of it over a five-year period and take a 10 percent investment tax credit.
If you need extra help, consider hiring people as independent contractors instead of employees, cautions Ms. Klotzburger. Even with only one employee, you are responsible for withholding income tax and social security taxes, and for piles and piles of extra paper work.
If you keep good records, you don't have to be afraid of the IRS, says Ms. Klotzburger. She suggests a simple envelope system. Keep an envelope for each category of expense - office supplies, materials, and so forth. Label each receipt and put it in the correct envelope as soon as you get back home from your shopping trip. In addition, support the receipt system with monthly bookkeeping.
Read the tax code, or a responsible book based on the tax code, carefully before you deduct. If you mislabel even a legitimate deduction - identifying a meeting place as a primary workplace, for example - the IRS will disallow the deduction.
One more word of caution: the IRS flags your return when you claim a deduction for a home-based business, warns Mr. Gumpert, and your likelihood of being audited is increased. So take all the deductions you can but only those you can reasonably document.