Reduce Your eBay Taxes with a Home Office Deduction
January 18, 2008
Do you know how much you’ll owe this year on your eBay income tax? Did you know you might be able to reduce those taxes by claiming a home office deduction?
If you’re running a profitable business on eBay hopefully you’ve been making estimated tax payments throughout the year to avoid any kind of fees and interest. I just sent in my estimated payment for fourth quarter of last year and it sure wasn’t any fun writing that check to the United States Treasury. If your home office qualifies, it may be one way you can shrink the size of the check you write the IRS.
eBay Home Office Deduction
As an eBay seller, you probably do most of the selling work from home. If your home office is your principal place of business, and you use it regularly and exclusively for business you can probably deduct part of your housing expenses on your tax return.
Principal Place of Business
To pass the ‘place of business’ test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers, or it must be a separate structure not attached to your home. Although I recently teamed up with an eBay partner, prior to that I did the majority of my eBay work in our home office. My wife will tell you that I spend more time in there than I do with her : )
Regular & Exclusive Use
Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don’t use this space for other purposes. For example, you can’t just clear off your dining room table and call your dining room a home office. The IRS is a big fan of documentation so I’d recommend keeping track of the hours you work each week as proof of the regular and exclusive use.
If you track your time electronically it’s a good idea to make periodic backups of that information in case the IRS ever comes looking for it. I use the export function in Freshbooks to download all the time I track there and burn it onto a CD for safe keeping.
Which Rooms Qualify?
Although I have a separate office, your home office does not have to constitute an entire room. You can identify part of a room as your home office, but you should have some type of partition and you should not mix personal items with your business items. In addition, if you are storing inventory in your home, then the portion of a room that is used for storage qualifies for the home office deduction.
Which Expenses Qualify?
Expenses that can be deducted as part of your home office include:
- mortgage interest
- real estate taxes
How Much Can You Deduct?
Keep in mind that only the business use percentage of these expenses can be deducted. The business use percentage is calculated by dividing the square footage of the office space by the square footage of the home, or by dividing the number of rooms you use for business by the number of rooms in your home.
Direct expenses, such as repairs made solely to the room used for your home office, or telephone lines installed just for business use, can be deducted in full. Indirect expenses, such as mortgage interest and real estate taxes should be allocated between the home office deduction and your itemized deductions to get the greatest tax benefit. Of course everyone’s situation is different so you can ask your tax advisor for guidance there.
Will You Get Audited?
The home office deduction is often considered by many to be a red flag. It’s more and more common these days so it doesn’t stand out as much as it used to, but you should still use caution when calculating this deduction. Keep good documentation that proves your office is your principal place of business and that you use it regularly and exclusively for business.
One thing to remember is that your business must earn a profit to take the home office deduction. If your home office expenses are larger than your business profits, you must carry the excess expenses forward to future years.
Be aware, if you deduct the depreciation expense of your home office you’ll have to pay tax on that depreciation when you sell your home someday. The amount of the depreciation deduction is taxed at a flat rate of 25% and reported on Schedule D. Basically what this means is that by using the depreciation deduction for a your home office now, you’re deferring the taxes to some point in the future.
Where Can I Get More Information?
The whole home office deduction can be a bit overwhelming for those of us who aren’t tax experts. You report your home office expenses on IRS Form 8829 and can turn to IRS Publication 587, Business Use of Your Home, for some more information.
If you’re interested in the home office deduction but are unsure of how to proceed, I’d recommend checking out a resource by a friend of mine, eBiz Tax Tips. Kristine is an expert in the field of entrepreneurial taxes and spent over a year capturing her knowledge in this guide. While this post talks about the home office deduction for eBay sellers the deduction can also apply to people that run other types of businesses from their home. The eBiz Tax Tips book covers not just eBay businesses but tax strategy for online businesses in general. Good luck with those taxes!
All posts by Ben Edwards