Applying the Home Office Deduction to an E-Commerce Business

September 23, 2019

Most people know already that if you work from home, you can deduct your office space from your tax return. However, not everyone knows exactly how to deduct their home office space, or what qualifies the office space for the deduction.

If you run an e-commerce business, there’s additional things that you may need to keep in mind – like where you store samples or inventory in your home?

If you’re looking for a way to deduct some more for your taxes

If you’re wondering if your home office qualifies you for a deduction – or if you should set up your own home office – check out the points below to see. 

Exclusive Use Test

The office portion of the home must be used exclusively and regularly.  Generally, a separate room or section of a room that is clearly divided by a partition qualifies as a home office.  You cannot use the office portion for personal use in order for it to qualify.

Exception to the Exclusive Use Test

The exclusive use test does not apply if you use a portion of your home to store samples or inventory.  Any limited personal use of the area used to store inventory will not disqualify a taxpayer from claiming the home office deduction.

Principal Place of Your Business

You must show that you use your home as your principal place of business.  If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may still qualify for a home office deduction.

If you have a separate, free-standing structure – like a studio, garage, or barn – and you use it exclusively and regularly for your business, that can also qualify for a deduction.

Calculating the Home Office Deduction

First step to calculate the home office deduction is to determine the square footage of the area used exclusively for your business and the total square footage of your home.  Once determined, two methods are available to calculate the home office deduction: simplified method and the regular/actual expense method.

The simplified method uses a standard rate of $5 per square foot for the area used for business purposes.  The maximum square feet allowed for this deduction is 300 square feet, meaning that a maximum deduction of $1,500 for the year.  For example, if your home office is 200 square feet, the home office deduction would be $1,000 if you use the simplified method.

The regular/actual expense method is based on a percentage of your home, for example, the office portion of your home is 150 square feet and the entire home is 1,500 square feet, the home office deduction would be 10% [200/2,000 = 0.1 = 10%]. 

The benefit of using the simplified method is the ease of calculation and little to no record keeping.  The benefit of using the regular method is the prorated allocation of all home related expenses such as utilities, real estate taxes, home mortgage interest, depreciation, etc.  

Note:  When using the regular/actual method, only the expenses incurred after the start of the business will determine the amounts allowed for proration.  

Get that Deduction!

Now that you know the rules, you can properly see if your home office qualifies you for a deduction. If it does, you now know how to calculate it for your taxes. If it doesn’t, you can make some changes to your space and maybe qualify next year!

Still unsure? Speak to a tax expert!