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Can Online Sellers Claim Storage of Products and Materials in Their Homes as a Business Expense?

Can Online Sellers Claim Storage of Products and Materials in Their Homes as a Business Expense?

The home office deduction is a frequently used, but frequently misunderstood, tax break for small business owners. With the home office deduction, small business owners can get a tax break for a prorated portion of the business owner’s home mortgage interest or rent, monthly utility bills, home repairs and depreciation. However, many business owners misunderstand or misuse the home office deduction by wrongfully claiming certain expenses as business expenses, or trying to write off part of their home mortgage payment or monthly rent, even if they don’t qualify for the deduction. This puts the business owner at risk for an IRS audit or tax penalties – so it’s important to understand the rules and limits of the home office deduction.

The IRS has specific rules in place to determine whether or not a business owner qualifies to use the home office deduction on their tax return. One of the frequently asked questions about the home office deduction is whether it can be used for home storage of retail inventory. Many online sellers store their products and materials in their homes, and they want to know if they can claim this home storage space as a tax-deductible business expense. In general, a home retail showroom or retail storage area CAN be used for the home office deduction, but you need to make sure that your home-based retail business passes the IRS’s strict rules.

Here are the two key tests and guidelines on how to figure out whether your retail business storage space qualifies for the home office deduction:

Regular Business Use

To qualify for the home office deduction, the storage space or retail showroom must be used regularly for business – not just a few times a year or during the busy retail season. Ideally, you should be storing inventory in that home storage space all year – not just on occasion.

Exclusive Business Use

Another test for the home office deduction is that the home business space must be used exclusively for business – no family or personal usage. This means that ideally, you can’t have your kids’ toys or your model train hobby equipment being stored in the same space as your retail inventory. If your tax return gets audited, the IRS field agent will likely want to come and visit your home and look around at your storage area to make sure that it truly is “business only.”

However: there is an exception to this rule that is favorable for small retail business owners. Inventory storage is an exception to the exclusive use rule – as long as your home is the only fixed location for your retail business. If you have a brick-and-mortar retail location or warehouse space, you probably will not qualify for the home storage exception, and you should not claim this deduction. (Just store your inventory away from home instead.)

There are a few other considerations involved with whether you can claim the home office deduction for your home-based retail business. This article should not be considered to be professional tax advice – please talk with your accountant or professional tax adviser before filing your tax return. But in general, by making sure your business meets the definition of these key rules for claiming home storage space as a business expense, you will be more likely to have a successful tax filing with no red flags for auditors.

Have you ever tried to claim the home office deduction, only to find out later that you were doing something wrong? What were some of the misunderstandings that you had about this tax rule? Please leave a comment and let us know!

Kabbage Team

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