Expenses for Business Use of the Home - Tax Form 8829
If you have a home-based business or you are using your home for business purposes, you may deduct expenses for business use of your home. This article will take you through the process of filing IRS Form 8829-Expenses for Business Use of Your Home.
Note that this article is presented for general information purposes. Your particular situation may be more complex or different from the situation discussed here.
Be sure to consult a tax professional for assistance with completing this form and claiming this deduction.
Before You Complete Form 8829
A few years ago, the IRS introduced a new simplified home office deduction method. This method is for small home offices (up to 300 square feet). The calculation is what's simplified. You simply multiply the square footage (see the calculation below) and multiply it by the multiplier ($5 a square foot at this writing). Read more about the simplified method to see if you might qualify. If you aren't sure, check with your tax professional.
Difficulty: Average; some calculations required. You may need to calculate depreciation.
Time Required: More than an hour, depending on complexity of situation.
Calculate the Part of Your Home Used for Business
Part I calculates the percentage of your home used for business. This section asks you to describe the part of your home that is used for business.
If you have a home-based business, you must set aside an area of your home that is REGULARLY and EXCLUSIVELY for business use. (This does not apply for day care businesses.)
For the calculation, you will need to determine the square feet of the area used for the business and divide that by the total square feet of your home, for a percentage used.
For example, if your home business area is 200 square feet, and the total area of your home is 2000 square feet, your home business takes up 10 percent of the total home area.
Allowable Deduction Calculation
In Part II to calculate the allowable deduction:
First enter the tentative profit from Line 29 of Schedule C. Then enter direct expenses and indirect expenses for:
- Casualty Losses
- Deductible Mortgage Interest, and
- Real Estate Taxes
- And Multiply by the percent of your home devoted to your business (line 7). Then, you can deduct
- Excess Mortgage Interest
- Insurance costs
- Repairs and maintenance
- Other expenses
- (Home office phone expenses are different and a little more complicated)
All of these deductions, added up, get you to get a total allowable operating expenses.
- Other Deductions
The next part is complicated (you will need a tax adviser), as it has to do with deductions carried over from the previous year and excess casualty losses and
depreciation (see step 6).
The total deduction for business home expenses is entered on Line 35.
- Part III - Depreciation of Your Home
This section is used to calculate the depreciation on your home, so it can be allocated to your home business according to the percentage on Line 7. A tax adviser can help you with this section. The total amount of depreciation is entered on Line 29 above (see Step 5).
- Part IV - Carryover of Unallowed Expenses
Some unallowed expenses may be able to be carried over to the next tax year. Again, you will need the help of a tax adviser to figure this one out.
Tips for Saving Time and Money
- As you can see, this form is complicated. You can help minimize the time (and expense) of having a tax preparer work on this form. Here are some ways you can prepare:
- Measure the square footage of the area used for your home business. Be sure there is nothing in that area that is not related to your business, except for decorations. Take several photos of the area from different angles, so it is clear that the area is used "exclusively" for business. Time/date the photo and keep a copy of it in a safe place.
- Also, calculate the total square footage of your home. If you have a realtor's listing from when you purchased the home, or if there is a legal document with the square footage, that will help to verify the number. If you can't find any other measurements, get a good measuring tape and walk around taking measurements of each room. Don't include bathrooms, the garage, or the basement (unless it's furnished). Keep the measurements in a safe place or in your tax file.
- Collect information on expenses for your home for the year, including property tax payments, mortgage interest statements, utility bills, homeowners insurance, rent payments, repairs and maintenance expenses.
- Distinguish direct expenses from indirect ones. Direct expenses are those directly related to your home business. For example, if you have your home business inventory in the garage and the roof leaked, you would need to repair the roof to protect your merchandise. That is a direct expense.
For more information, see this article on how to prepare your home business space for a tax audit.