Q: "Can I deduct storage space for my eBay inventory as part of my home office deduction?"
- Q: "When I take the home office deduction, can I deduct all of my home office expenses?"
- Q: "Where can I find a list of deductions associated with a home office? I am curious whether expenses such as my trash service and my water bill are included. Also, if my Internet service is used 100 percent of the time for conducting business (my husband and I run two separate businesses that require Internet service), can I deduct the entire cost instead of the home office percentage?"
- Q: "If I take the home office deduction, will I have to pay capital gain taxes on the business portion of my house when I sell it?"
- Q: "Can you take a home office deduction if you rent rather than own your home?"
- Q: "I use a portion of my neighbor's basement to store my eBay inventory. Can I take a home office deduction for that portion of her basement I use for storage?"
A: If you use areas in your basement, garage, or attic as storage space for your inventory, you can add it to your home office space in order to take the deduction. You cannot deduct your entire basement, though, if you use only a portion of that space to store inventory. Use duct tape to make the boundaries of the business portion of your basement, attic, garage, or barn, so that if you are ever audited, the IRS agent can see clearly where your home office space ends and your personal space begins.
Q: "When I take the home office deduction, can I deduct all of my home office expenses?"
A: No, but you can deduct most of them. Expenses for which you already take a deduction, such as the interest on your home mortgage, cannot be deducted a second time when you take the home office deduction.
Expenses for work done outside the home (such as lawn care or landscaping services) cannot be deducted when you take the home office deduction, since by definition a home office can only be inside a home—unless, of course, your home-based business is a lemonade stand.
Similarly, expenses that are deemed to be of a strictly personal nature cannot be deducted when you take the home office deduction. If you're a Hollywood actor, you probably can deduct the services of a masseuse or personal trainer who comes to your home and performs these services there. I wouldn't try deducting these for an eBay selling business, however, no matter how stressful it may be putting up all those listings.
Q: "Where can I find a list of deductions associated with a home office? I am curious whether expenses such as my trash service and my water bill are included. Also, if my Internet service is used 100 percent of the time for conducting business (my husband and I run two separate businesses that require Internet service), can I deduct the entire cost instead of the home office percentage?"
A: Appendix E to this book is a useful checklist of things that a typical eBay seller can deduct; items marked with an asterisk (*) on this checklist may be taken as part of the home office deduction, to the extent of your home office percentage. This percentage (actually a fraction) is the ratio of the square footage of your home office to the total interior square footage of your home. So, for example, if you have a 5,000-square-foot home and you use 1,000 square feet of that space for a home office, your home office percentage is one-fifth, or 20 percent, and you can deduct 20 percent of all qualifying home office expenses.
IRS Publication 587, Business Use of a Home, is the source of all knowledge when it comes to the home office deduction (like all IRS publications and forms, it is available as a free download from the IRS website, irs.gov). According to this publication, the "home office fraction" of both your trash service and your water bill is deductible. If you can prove your Internet service is used exclusively for your eBay business, you should be able to deduct the entire cost on Schedule C, but be really careful here lest the IRS auditor find even one video game on your computer.
Q: "If I take the home office deduction, will I have to pay capital gain taxes on the business portion of my house when I sell it?"
A: This was the law prior to 2003, and it may well be the law again someday when Congress has to raise cash in a hurry, but it's not the law today.
As long as you live in your home for at least two out of the five years before you sell it, the first $250,000 (for single taxpayers) or $500,000 (for married taxpayers filing jointly) of profit is not taxable. Taking the home office deduction does not affect or change that in any way.
You will, however, have to pay a capital gain tax (called a depreciation recapture) in the year you sell your home, equal to 25 percent of the total depreciation deductions you took on your home office since May 6, 1997—but only the depreciation deductions, not every other deduction you took for your home office.
And if you didn't depreciate your home for tax purposes (which is a complex decision requiring the assistance of your accountant or tax adviser), you won't have to pay even that.
Q: "Can you take a home office deduction if you rent rather than own your home?"
A: If you rent a home or apartment, you can take the home office deduction for the home office percentage of your rent and other household expenses.
Since you do not own your home or apartment, however, you cannot depreciate it for tax purposes.
You are also required to give your landlord a Form 1099-MISC each year showing how much of your rental payments (not other expenses) you deducted. Your landlord will absolutely love you for doing this (not!), so be sure to give your landlord a heads-up before giving them a nasty surprise come tax season next year.
Q: "I use a portion of my neighbor's basement to store my eBay inventory. Can I take a home office deduction for that portion of her basement I use for storage?"
A: No. You cannot take a home office deduction on any portion of another person's home. But there may be another way you can deduct it: Have your attorney draw up a lease for the space, have the owner of the other home signed as "landlord" (you would sign as "tenant"), and pay the other homeowner a reasonable rent for the space. That way, you could deduct the rent you pay the other homeowner for the use of her garage, attic, basement, or barn. Make sure you are paying a fair market rent.
Do not conduct any other business at the other homeowner's address, or else you open yourself up to an IRS claim that you are not conducting your eBay selling business "solely and exclusively" from your home office. Also, don't let your relationship with the other homeowner get too cozy, because if you do, there's a risk the other person might be considered your partner in the eBay business (see Chapter 20), which has significant legal and tax ramifications for both of you.