Form 8829, otherwise known as “Expenses for Business Use of Your Home,” is a tax document used by individuals operating home-based businesses in the United States. This form enables entrepreneurs to claim deductions for expenses associated with using their residence for business purposes.
Self-employed individuals can claim the home office tax deduction by meeting specific eligibility criteria:
- Self-Employment Requirement: Limited to those who are self-employed, like independent contractors, sole proprietors, and freelancers.
- Exclusive Use: The workspace must be used solely for business purposes, with some exemptions for specific uses like home-based daycare services and utility rooms for laundry or storage.
- Regular Use: The home office must be the primary workspace, consistently utilized for business activities. Infrequent use doesn’t meet IRS standards for a home office deduction.
For those with multiple home-based businesses, if any of their different lines of business fails to meet the above criteria, the home office deduction becomes invalid for all of them.
What Is Form 8829?
Form 8829 is an IRS tax form for sole proprietors seeking to determine deductible home office expenses accurately. You must file it alongside your personal tax return, specifically reported on line 30 of Schedule C (Form 1040).
What Is Schedule C on IRS Tax Form 1040?
Schedule C, titled “Profit or Loss from Business (Sole Proprietorship),” is crucial for sole proprietors and independent contractors filing IRS Tax Form 1040. It allows individuals to report business income, including sales and fees, and deduct expenses like rent, utilities, and supplies.
The resulting net profit or loss is then transferred to Form 1040 to calculate overall taxable income.
Form 8829 is a valuable tool for those who maintain a dedicated workspace within their homes, serving as their primary place of business. If you run a business from home and have a designated workspace, you may qualify for a tax break concerning home office expenses.
The deduction amount relies on the chosen method:
- Standard Method: Calculate deductible expenses by determining the percentage of household expenses allocated to the workspace. This involves determining the square footage in relation to the total square footage of the home and listing indirect expenses (of the entire house) and direct expenses (solely for the office space) for the deduction.
- Simplified Option: Multiply the IRS-set rate by the workspace square footage for a straightforward deduction calculation. However, this option has limitations: the home office space cannot exceed 300 square feet, and it doesn’t allow deductions for depreciation or home-related itemized deductions.
To be eligible for the home office tax deduction, the total deductible expenses must not surpass the income generated from the specific business for which the deductions are claimed.
Defining a Home Office
The IRS broadly categorizes the term “home” for tax write-off purposes to include various types of residences like houses, apartments, condominiums, mobile homes, or even boats. It extends to structures on the property, such as unattached garages, studios, barns, or greenhouses.
A home office represents a designated space within a person’s residence for official business purposes. Qualified taxpayers, as permitted by the IRS, can claim a home office on their tax return, enabling deductions for specific home-related expenses.
This office space becomes the primary place of business. Employees of a company are ineligible to claim this deduction. Your home office should be where essential business management and administrative tasks occur, such as billing clients, maintaining records, or managing supplies. Even if you conduct business elsewhere, this office must serve as the primary hub for such activities.
Principal Place of Business
To determine if your home office qualifies as your primary business location, two factors should be considered:
- The significance of activities performed at each business location.
- The duration of time spent at each business location.
For your workspace to qualify as the principal place of business, you must meet the following conditions:
- You use it exclusively and consistently for management or administrative activities related to your trade or business.
- You don’t have another permanent site where you conduct significant management or administrative activities.
The functionality of a home office involves its setup for those working from home, equipped with essentials like a desk, chair, computer, or laptop, internet connectivity, and often specific software facilitating remote work interactions with colleagues.
The IRS mandates that only areas exclusively used for business purposes can be considered for home office deductions.
Legitimate Business Expenses
The IRS allows deductions of direct expenses for business use of home and indirect expenses shared by business and home.
|Payment for the part of the residence used for business-related activities.
|Yes, provided you are not the owner of your residence.
|Costs associated with utilities - like electricity, gas, and water - used specifically for conducting business within the household.
|Maintenance and repairs
|Costs for maintaining and repairing the section of the residence designated for business-related use.
|Insurance expenses paid on your residence.
|Home office supplies
|Costs related to supplies for a home office, including items like paper, pens, and printer ink.
|Yes, if their use is dedicated to business-related activities.
|Home office furniture
|Costs for furniture like desks and chairs used within the home.
|Yes, if their use is for business purposes.
|Home office equipment
|Costs for computers, printers, and fax machines.
|Yes, provided that their use is related to business activities.
|Depreciation is a deduction for the deterioration of property used in business operations. However, cannot be claimed for the segment of your home utilized for personal purposes.
|Yes, only if Form 8829 is used to calculate the home office deduction.
|The interest that is paid on the mortgage for your residence.
|Real estate taxes and HOA fees
|Property taxes paid on your home.
Who Uses IRS Form 8829?
Typically, Form 8829 is employed by sole proprietors, independent contractors, freelancers, and individuals with small businesses who conduct business activities from their homes. If your work involves online selling, freelance writing, designing, consulting, or any business-related activities from a home office, leveraging the tax deductions associated with operating a home-based business can significantly reduce your tax burden.
The deductibility extends to a diverse range of expenses, all contributing to the business activities conducted from home. Even if your office primarily serves for advertising your business services, these expenses can be claimed as deductions on your tax return.
To be eligible for these deductions, several criteria must be met:
- You must be self-employed or own a business, meaning you earn income by contracting with a trade or business directly, as opposed to working for an employer who pays a consistent salary or wage. This distinction is specified by the 2017 Tax Cuts and Jobs Act (TCJA), and work-from-home employees do not qualify for this deduction.
- Your home must serve as the principal location for conducting your trade or business.
- A portion of your home should be used exclusively and regularly for conducting business operations.
It’s important to note that a separate Form 8829 is required for each home used for business during the year.
However, there are scenarios where Form 8829 should not be used:
- If you are a partner claiming home office expenses or are reporting these expenses on Schedule F (Form 1040).
- If your expenses entirely relate to inventory costs or if you have opted for the simplified method for home expenses in the tax year.
How to Fill Out Form 8829
Form 8829 is divided into four parts, which require attention to detail and meticulous calculations:
Part I – The Percentage of Your Home Used for Business Purposes
This section involves calculating the percentage of your home used exclusively for business purposes. By inputting the square footage of your office space (Line 1) and total area (Line 2), you determine the business percentage (Line 3). Remember, ‘exclusively’ means solely used for business, and ‘regularly’ refers to ongoing usage.
Lines 4-7 are dedicated to daycare businesses, calculating the percentage of the day your home serves as a daycare facility. Note: You’ll need the annual operating hours for your daycare. Skip these lines if daycare services are not part of your business. Further guidance is available in Form 8829’s instructions under “Special Computation for Certain Daycare Facilities.”
Part II – Allowable Deductions
Here, you list your direct and indirect expenses to determine your allowable deduction. If applicable, you’ll also calculate any carryover operating expenses from the previous year and assess casualty losses.
Line 8 involves entering your business’s tentative profit or loss from Schedule C, although there are exceptions if your business operates elsewhere or if there are capital gains or losses tied to your home office work.
Line 9 refers to “casualty losses,” signifying property loss or damage resulting from unexpected events such as hurricanes.
Lines 10 through 26 are designated for recording the bulk of your home office expenses and carrying forward expenses unclaimed in prior years. If you opt for the standard deduction and encounter no casualty losses, start from line 16. For those itemizing deductions, ensure Schedule A is completed before finalizing Form 8829.
Line 27 indicates that Form 8829 considers the allowable operating expenses for the year as the lower amount between the totals on lines 15 or 26. Any excess amount on line 26 over line 15 can be carried forward for next year’s business taxes.
Lines 28 through 36 will require revisiting after completing Part III (Depreciation). Line 36 designates the amount reported on Schedule C to be deducted.
Part III – Home Depreciation Expenses
To complete this part, you’ll need information about your home’s adjusted basis and fair market value. Use the chart in the form’s instructions to establish the depreciation percentage. This section calculates the depreciation of the business part of your home.
Lines 37 through 40 inquire about the adjusted basis or fair market value of your house, delineated between land and building.
Line 41 requires you to enter the appropriate depreciation percentage found in the instructions provided by the IRS.
Line 42 instructs multiplying the depreciable basis of your house by the depreciation percentage, then returning to Part II to complete any omitted sections.
Part IV – Carryover of Unallowed Expenses
If your business income was less than your allowable expenses, this section helps determine the amount you can carry over to the next tax year. It involves reconciling expenses to establish the portion that can be carried forward.
Line 43 requires subtracting the amount on Line 27 from the value on Line 26 to determine your overall operating expenses for the year.
Line 44 involves subtracting the value of Line 33 from Line 32 to calculate any surplus casualty losses and depreciation.
How to File Form 8829
Form 8829 can be filed online or through a third-party service alongside Schedule C as part of your 1040 tax return. Additionally, if your adjusted gross income (AGI) is $73,000 or less for the current tax year, you can use the IRS Free File option to prepare and e-file your return.
For those choosing not to file online, mailing your tax return and its related schedules and forms remains an option. Your state of residence determines the mailing address, and the IRS offers a state-specific list online for reference.
Form 8829 Sample
Below, you can download Form 8829 in PDF so you can start filling it out.
Frequently Asked Questions
What is excess mortgage interest on Form 8829?
Excess mortgage interest on Form 8829 involves mortgage interest payments that exceed the allowable limits set for personal expense deductions. When you use your mortgage to acquire, construct, or substantially improve the residence serving as your business space, the interest payments associated with that mortgage become relevant for inclusion on Form 8829.
The form enables the deduction of interest linked explicitly to the business portion of your home. This delineation allows you to claim these expenses accurately and in compliance with IRS guidelines. Therefore, if your mortgage payments surpass the thresholds applicable to personal deductions and are attributable to your home office, those excess amounts can be included on Form 8829 to determine the eligible deduction for your business-related home expenses.
How much is the self-employment tax?
Self-employment tax is a combined tax that covers Social Security and Medicare contributions for self-employed individuals. It stands at 15.3% of your net earnings from self-employment. Specifically, this includes 12.4% for Social Security and 2.9% for Medicare.
For Social Security, this tax applies to the first portion of your net earnings up to a certain threshold set by the IRS each year. However, the Medicare portion applies to all your net earnings with no income cap.
You can deduct half of this tax amount – equivalent to what an employer typically covers – as a business deduction when computing your taxable income. This deduction lessens your taxable income, reducing the tax burden on self-employment earnings.
How can individuals in partnerships and farm owners with self-employment income calculate the home office deduction?
Partners in a partnership or farm owners who earn self-employment income from their respective ventures have distinct methods for calculating the deduction for the business use of their home. Rather than using Form 8829, these individuals leverage a specialized tool known as the “Worksheet To Figure the Deduction for Business Use of Your Home,” which is accessible in IRS Publication 587.
How many days per week do you have to work from home to get a tax break?
To qualify for tax breaks associated with home offices, the home office must serve as your primary place of business, where significant business activities are regularly carried out.
The IRS doesn’t mandate a definitive number of days or hours you must work from home to claim tax breaks related to your home office. Instead, the emphasis lies on the exclusive and regular use of the home office. Maintaining accurate records of your business-related activities within the home office can support your home office tax deduction eligibility.