Home Office Deduction for Inventory Storage

Are you are an eCommerce seller who stores inventory in a closet, basement, office, attic, garage or other location in your home? You may be able to use the Home Office deduction for those spaces to reduce your tax burden. This article explains how to qualify for the Home Office Deduction and how it can be used for inventory storage in your home.

Qualifying for the Home Office Deduction

Generally, qualifying for the home office deduction requires that you meet two criteria:

1. Your home must be the Principal Place of Business for your business AND
2. the spaces you are claiming must meet the criteria of Exclusive and Regular Use.

If you run your eCommerce business from home and have no other place of business, you may qualify for that first criteria. In addition, you may ONLY use the the space you are claiming for your home office deduction for business, not for any other purposes. Here is a link to the IRS page describing the Home Office Deduction in more detail and we recommend you consult with a tax professional to see if you qualify.

Let’s talk about a couple inventory storage examples with the home office deduction to clarify.

If you use a spare room in your home for mixed purposes, such as storing your own out-of-season clothing or other personal items mixed in with the inventory for your business, you will forfeit your ability to claim the home office deduction for that space. If, however, there’s a portion of the room that is dedicated exclusively to inventory and that section is separate from the space used for personal items, the portion dedicated to inventory storage would be acceptable to claim.

The same is true of spaces for packing and shipping.  If you use your dining room table for these purposes, and that is where you also eat all your meals, it would not qualify as a business-use-only space.  However, if you pack and ship in a corner of an office that is never used for personal purposes, that space would qualify.

How to Calculate Your Home Office Deduction

If you qualify for the home office deduction, there are two methods for calculating the amount to deduct. There is both a simplified method to calculate your deduction, which many people find to be easier to use, and a regular method.

Simplified Method

The simplified method is quite simple. It allows you to measure the square footage dedicated to your business and then calculate $5 per square foot. But there is a limit of up to 300 square feet. This method applies to both a traditional home office space where you work for your business and spaces in your home you use for dedicated inventory storage for your business.

Let’s say you store inventory in one dedicated closet of the home as well as a portion of your basement. If the closet measures 30 square feet and the portion of the basement dedicated to inventory measures 120 square feet, that would be a total of 150 square feet. Let’s say you also have an 10×12 office that you use exclusively for your business to list items for sale, manage customer support, purchase inventory and package items for your business, so that would be another 120 square feet. (Remember, this office must be a dedicated space for your business, not a mixed-use space!). The closet, plus the portion of the basement, plus the office is 30 sf + 120 sf + 120 sf = 270 sf. This meets the test that it is not above the maximum allowed of 300 square feet. The total of 270 square feet is multiplied by $5 to be $1,350, so that would be the amount of your Home Office deduction on your taxes.

Now, some of our larger sellers may look at at that 300 square foot maximum and say, aw, isn’t that cute. But I have way more inventory than that. For folks in that situation, you might want to consider the “regular method.”

Regular Method

To use the Regular Method, you would divide your expenses of operating the home into those that are business-related and those that are personal. You may deduct any purely business expenses in full. For shared expenses, you may allocate the portion that are business-related as a percentage of the total, using the percentage of square footage in the home that is dedicated to the business.

For example, let’s say your home is 2000 square feet. If 350 square feet are dedicated to your business, you would use 17.5% as the percentage that is business-related. Deductible expenses for business use of home include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs, etc. In this example, you could deduct 17.5% of each of these costs. Again, you should consult the IRS details and seek advice from a tax professional to get this exactly right. And you may use either the Regular method or the Simplified method, but not both.

Edge Cases

Now let’s clarify some edge cases that might apply to you:

What if your inventory is stored in a separate detached structure on your property such as a garage, barn, shed or other out-building?  So long as you meet both the Principal Place of Business and Exclusive and Regular Use criteria, all of these would qualify.

What if you live in an apartment or condo instead of a home? Or you rent your home instead of owning it? Or you live in a mobile home or on a boat? Again, if you meet both the Principal Place of Business and Exclusive and Regular Use criteria, these would all qualify as well.

Let’s say you’ve outgrown your home as a place to store inventory. You store the bulk of your inventory in a rented warehouse, but some inventory gets stored at home too. In this case, you may NOT meet the criteria necessary to use the home office deduction. Your home may no longer be the principal place for your business. According to the IRS, inventory storage is deductible “so long as your home is the SOLE fixed location of such trade or business”. Consult a tax professional for further advice on this situation.

How do I enter a Home Office Deduction in Seller Ledger?

If you’re already using Seller Ledger, entering a Home Office Deduction is very easy. Simply go to the Expenses tab and click the “Add Expense” button in the upper right. When prompted, enter a description like “Home Office Deduction” and the amount you’ve calculated.  Seller Ledger will automatically know to categorize that expense and it will roll up on your real-time Schedule C form.  You can always reach out to us at [email protected] with any questions.

If you’re not yet using Seller Ledger, feel free to give it a try. We offer a 30 day free trial to all customers, no credit card required.  You can learn more at www.sellerledger.com. For tips on additional deductions that may apply to you, you can also see our blog post on 3 Hacks to Maximize Mileage Deductions.

• Category: Accounting/Bookkeeping, Deductions, Home Office, Inventory