Operating Expense: Deducting Home Office Costs
If you are like most eBay entrepreneurs, you are likely running your operation from home. If so, you may be able to claim as a business deduction a portion of your rent, utility bills, cleaning services, homeowner fees, and other home-related costs. Although commonly referred to as the “home office” deduction, this deduction actually applies to any home space you use for your eBay business, including a studio or workshop.
Meeting the test. To qualify for the home office deduction, you must use your home workspace exclusively and regularly for business, in addition to meeting other tests, listed below. The requirements to qualify for a home office deduction are slightly different if the home is used to store of inventory (see below).
Exclusivity. You meet the requirement of exclusivity if you use the home workspace only for managing eBay matters, and not for personal or other purposes. You are not required to devote an entire room to your eBay business to qualify; you can use just a portion of one, so long as that portion is used exclusively for eBay business. If you mix business with personal matters — for example, you use your workspace to correspond with clients and handle business bookkeeping, but also to play online poker and pay household bills — then you do not qualify for the home office deduction.
There is some flexibility with regard to the exclusivity requirement if you’re using your home to store inventory. If you use part of your home for storage of eBay inventory, you can deduct the expenses related to this business use of your home without meeting the "exclusivity" standard, provided you meet all of the following tests:
You sell the inventory as part of your eBay business.
You keep the inventory in your home for use in your eBay business.
Your home is the only fixed location of your eBay business.
You use the storage space on a regular basis.
The space you use is a separately identifiable space suitable for storage.
Regular use. You must also use your home office regularly; that is, on a continuing basis and not just for occasional work. The IRS has never clearly explained exactly what it considers regular use. One court found 12 hours a week sufficiently regular, but no one really knows how low you can go.
It doesn't have to be a house. You don’t have to live and work in a house to take the home office deduction. Apartments, condominiums, or even motor homes, houseboats, and other vehicles that double as your home and workspace can qualify, but you must meet the tests set out above. Simply owning a vehicle that you use as a residence and running a business are not enough, in themselves, to prove your entitlement to the deduction. You must also be able to demonstrate a business use of the vehicle.
Other requirements. If you use your home office exclusively and regularly for eBay business, you will qualify for the home office deduction if you meet one of these additional tests:
Your home office is your principal place of business. If you do all or almost all of your eBay business in your home office, you meet this test. If you work in more than one location, however, you must show that you perform your most important business activities or carry out your administrative or management tasks at home. For example, if you sell used vinyl recordings on eBay but you spend a lot of time buying vinyl record collections — that is, traveling to other people's homes to examine collections — you will qualify for the home office deduction as long as you manage your eBay listings, billing, and other important business at home.
You use a separate freestanding structure on your property. If you regularly and exclusively use a standalone building, such as a detached garage, cottage, or workshop, you may use the home office deduction for that space — even if that structure is not your principal place of business.
What can you deduct? Using the home office deduction, you can deduct a portion of your household expenses, including:
mortgage interest and property taxes (the advantage of taking a portion of these costs as a business deduction rather than a personal deduction — as you are entitled to do on IRS Schedule A, Itemized Deductions — is that it reduces your business income and therefore your self-employment taxes)
condominium or homeowners’ association fees
depreciation on a home you own
maintenance and cleaning
security costs, and
The exact percentage of these expenses you can deduct depends on how much of your home used for business. There are two ways to calculate this percentage:
Using the room method. Divide the number of rooms you use for business by the total number of rooms in your home (not including bathrooms, closets, and other storage areas). For example, if you use the spare bedroom of your four-room home for business, you can deduct 25% of your household expenses.
Using the square footage method. Divide the square footage of the area you use for work by the total square footage of your home (do not include stairways, hallways, landings, entries, attics, or garages in your calculations unless the attic or garage is part of your home office). For example, if you use a ten-foot-by-20-foot room as an office in your 1,000-square-foot home, your home office deduction percentage is 20%.
In addition to deducting a portion of overall household expenses, you may deduct 100% of any expense incurred solely for your home office. For example, if you pay someone to paint the entire interior of your home (including your work area), you may deduct only the home office portion of the cost. But if you hire a painter to paint just your home office, you can deduct the entire amount.