Work from home, pay less tax: IRS Form 8829

How to Fill Out IRS Form 8829 and Claim Your Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

In this article, we will explain how to fill out IRS Form 8829 and claim your home office deduction. We will also cover some relevant topics, such as the simplified method, the regular method, the exclusive use rule, and the principal place of business rule.

Here is a table of contents with links to help you navigate this article:

Simplified Method

The simplified method is an optional way to calculate your home office deduction. You can use this method if you meet the basic requirements for claiming the deduction. The simplified method does not require you to fill out Form 8829. Instead, you can use Schedule C (Form 1040) to claim a flat rate of $5 per square foot of your home office, up to a maximum of 300 square feet. This means you can deduct up to $1,500 per year using the simplified method.

The advantage of the simplified method is that it is easy and quick to use. You do not need to keep records of your actual expenses or allocate them between personal and business use. You also do not need to worry about depreciation or recapture of depreciation when you sell your home.

The disadvantage of the simplified method is that it may result in a lower deduction than the regular method. You cannot deduct any additional expenses, such as utilities, insurance, repairs, or depreciation, using the simplified method. You also cannot carry over any unused deduction to the next year.

Regular Method

The regular method is the traditional way to calculate your home office deduction. You can use this method if you meet the basic requirements for claiming the deduction. The regular method requires you to fill out Form 8829 and attach it to your Schedule C (Form 1040). Using this method, you can deduct a percentage of your actual expenses for the business use of your home, based on the proportion of your home used for business.

The advantage of the regular method is that it may result in a higher deduction than the simplified method. You can deduct a variety of expenses, such as mortgage interest, property taxes, utilities, insurance, repairs, maintenance, depreciation, and more, using the regular method. You can also carry over any unused deduction to the next year.

The disadvantage of the regular method is that it is more complicated and time-consuming to use. You need to keep records of your actual expenses and allocate them between personal and business use. You also need to deal with depreciation and recapture of depreciation when you sell your home.

Exclusive Use Rule

One of the basic requirements for claiming the home office deduction is that you must use a specific area of your home exclusively for your trade or business. This means that you cannot use that area for any personal or family activities. For example, if you use a spare bedroom as your home office, you cannot let your guests sleep there when they visit. If you use a corner of your living room as your home office, you cannot watch TV there when you are not working.

The exclusive use rule does not apply to certain storage areas or rental units in your home. It also does not apply if you use part of your home as a daycare facility or for the storage of inventory or product samples.

Principal Place of Business Rule

Another basic requirement for claiming the home office deduction is that you must use your home as your principal place of business. This means that you conduct most of your income-producing activities in your home office, or that you use your home office regularly and substantially for administrative or management activities related to your business. For example, if you are a freelance writer who works from home most of the time, your home office is your principal place of business. If you are a plumber who works at different locations, but you use your home office to schedule appointments, invoice customers, and keep records, your home office is your principal place of business.

The principal place of business rule does not prevent you from having another office outside your home, as long as you use your home office more frequently or significantly for your business. It also does not prevent you from deducting expenses for traveling between your home and other work locations.

Form 8829 Instructions

If you decide to use the regular method to calculate your home office deduction, you need to fill out Form 8829 and attach it to your Schedule C (Form 1040). Here are some instructions on how to complete Form 8829, and an example for extra clarity below:

1. Part I: Calculate the percentage of your home used for business. You can use either the area method or the rooms method. The area method divides the square footage of your home office by the total square footage of your home. The rooms method divides the number of rooms used for business by the total number of rooms in your home. You can choose the method that gives you a higher percentage, as long as it is reasonable.
2. Part II: List the indirect expenses for the business use of your home. These are expenses that apply to the whole house, such as mortgage interest, property taxes, utilities, insurance, repairs, and maintenance. You can deduct the business portion of these expenses, based on the percentage from Part I.
3. Part III: List the direct expenses for the business use of your home. These are expenses that apply only to the home office, such as painting, carpeting, or furniture. You can deduct the full amount of these expenses.
4. Part IV: Calculate the depreciation deduction for the business use of your home. You can use either the general depreciation system or the alternative depreciation system. You need to know the basis and the recovery period of your home. The basis is usually the cost of your home plus any improvements. The recovery period is usually 39 years for nonresidential property and 27.5 years for residential property.
5. Part V: Calculate the allowable deduction for the business use of your home. You cannot deduct more than the gross income from your business minus the business expenses that are not related to the use of your home. If your deduction is limited by this rule, you can carry over the excess to the next year.

Example for extra clarity

Here’s an example of someone filling out Form 8829:

• Part I: Sam uses his spare bedroom as a home office for his online tutoring business. His home has a total area of 1800 square feet, and his home office has an area of 150 square feet. Using the area method, he calculates the percentage of his home used for business as 150/1800 = 0.0833 or 8.33%. His home has 9 rooms, and he uses one room for business. Using the rooms method, he calculates the percentage of his home used for business as 1/9 = 0.1111 or 11.11%. He chooses the rooms method because it gives him a higher percentage and it is reasonable.
• Part II: Sam’s indirect expenses for the business use of his home are $12,000 for mortgage interest, $3,000 for property taxes, $1,200 for utilities, $600 for insurance, $300 for repairs, and $200 for maintenance. He adds up these expenses and gets a total of $17,300. He multiplies this amount by the percentage from Part I (11.11%) and gets $1,922.13 as the business portion of his indirect expenses.
• Part III: Sam’s direct expenses for the business use of his home are $500 for painting the home office, $800 for carpeting the home office, and $1,000 for buying a desk and a chair for the home office. He adds up these expenses and gets a total of $2,300. He can deduct the full amount of these expenses.
• Part IV: Sam bought his home in 2010 for $300,000 and made no improvements to it. His basis is $300,000. He uses the general depreciation system and treats his home as nonresidential property with a recovery period of 39 years. He divides his basis by the recovery period and gets $7,692.31 as the annual depreciation amount. He multiplies this amount by the percentage from Part I (11.11%) and gets $854.36 as the depreciation deduction for the business use of his home.
• Part V: Sam’s gross income from his online tutoring business is $25,000. His business expenses that are not related to the use of his home are $5,000 for advertising, $2,000 for supplies, and $1,000 for internet service. He subtracts these expenses from his gross income and gets $17,000 as the net income from his business. He adds up the deductions from Part II ($1,922.13), Part III ($2,300), and Part IV ($854.36) and gets a total of $5,076.49 as the deduction for the business use of his home. This amount is less than his net income from his business, so he can deduct it in full.

Tips and Tricks

Here are some tips and tricks to help you maximize your home office deduction:

• Keep accurate and detailed records of your income and expenses related to your business and your home office. You may need to provide proof of your claims in case of an audit.
• Measure and document the size and location of your home office. You may want to take photos or draw a floor plan to show how you use that area exclusively for business.
• Review your expenses regularly and make sure you allocate them correctly between personal and business use. You may want to use separate accounts or credit cards for your personal and business expenses.
• Compare the simplified method and the regular method each year and choose the one that gives you a higher deduction. You can switch between the methods from year to year as long as you meet the requirements.
• Consult a tax professional if you have any questions or doubts about claiming the home office deduction. They can help you understand the rules and avoid any mistakes or penalties.

We hope this article has helped you learn how to fill out IRS Form 8829 and claim your home office deduction. Remember, this article is for informational purposes only and does not constitute legal or tax advice. Always consult a qualified professional before making any tax decisions.