Using the Home Office Deduction Without an Office

CPAs & Advisors

Kelly Brown
Kelly Brown CPA, MST Tax Supervisor CPAs & Advisors

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You don’t necessarily need to have an “office” to make use of the home office deduction. While having office space in your home for exclusive business use is a great way to capture that deduction, other business use of your home, including dedicated storage space for inventory, may also qualify.
For example, if you have an eBay business, perhaps you have considered the home office deduction, but know that realistically your laptop follows you around the house and you probably make personal use of any areas where you do administrative tasks, but have you considered where you store your inventory? Do you have a separate closet, room or section of your basement where you keep inventory or items you have listed for sale, or are going to list? If that area is exclusive to your business, you may qualify for the home office deduction.
Per Internal Revenue Code section 280A(c)(2), certain storage space used within a personal residence is not disallowed from the definition of a home office expense to the extent that it is used on a regular basis to store the inventory or product samples of the taxpayer, or held for use in the taxpayer’s trade or business of selling products at retail or wholesale – but only if the dwelling unit is the sole fixed location of such trade or business.
  • Example 1: You have a separate shelving unit in your basement that holds boxes of inventory. This space used exclusively for your business may be included when determining your home office deduction.
  • Example 2: You have some clothing and purses that you have listed on eBay that are kept in your closet, interspersed with your own personal items. This would not be exclusive use and this area could not be used as part of your home office deduction calculation; however, if you were to amass several items into an area of your closet, exclusive for items you are selling, this section of the closet could qualify.

Home office deductions are limited by the amount of associated home business income—in other words, you cannot use the home office deduction to put you into a net taxable loss, but you can use it to bring your home business income to zero. There is a simplified method and a non-simplified method for calculating the deduction, and the IRS allows taxpayers to choose annually whichever method they prefer.

  • The simplified method is easier to work with; however, it is limited to 300 square feet of designated space and any unused portion cannot be carried forward to the next tax year.
  • The non-simplified method is based on the percentage of the home used for business purposes and it incorporates utilities, real estate taxes and home insurance into the computation. The record-keeping and calculations are more complex, and tracking depreciation and basis is also required, but using this method allows a taxpayer to carry forward unused portions of the deduction into a year where there is sufficient income to utilize it.

Proper planning and documentation is key to the optimum tax treatment. Please let me know if you would like me to assist you with your home office deduction or any other tax matters.

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