The two methods of home office deductions are:
- You can calculate the square footage of your home office, multiply that figure by $5 per square foot (up to 300 square feet) and claim it on your personal tax return (using Schedule C of Form 1040).
- Use Form 8829 to calculate the various expenses involved in using and maintaining your home office and then claim that figure on your personal tax return.
The first method is much simpler and makes sense for most small businesses and contractors, but sometimes choosing the second method might get you a higher deduction. Here’s how to do that.
What is Form 8829?
Form 8829, Expenses for Business Use of Your Home is the tax form that businesses use to itemize, calculate and claim their home office expenses. You file it at the same time you file your personal tax return, and report the deduction you calculate on it on line 30 of Schedule C of Form 1040.
You don’t need to file Form 8829 if you’re using the simplified option for home office deduction we described above.
What kinds of expenses can I deduct on Form 8829?
Expenses that are included in the IRS’s home office deduction and that you may be able to deduct on Form 8829 include:
- Deductible mortgage interest
- Real estate taxes
- Home insurance
- Rent
- Repairs and maintenance
- Utilities
- Depreciation on your home
What does Form 8829 look like?
Form 8829 is a one-page form from the IRS that looks like this:
It’s divided into four parts. Here’s how to fill out each one:
Part I
In this section you’ll determine exactly what percentage of your home you’re using for business purposes (this is sometimes called your “business percentage”).
Lines 1-2 will ask you for both the area of your home that you use “exclusively” and “regularly” for business purposes, and for the total area of your home.
“Exclusively” here means that you don’t use that part of your home for any other purpose other than running your business. “Regularly” means you use it on an ongoing basis. The IRS goes into more detail about what qualifies as exclusive and regular use in the instructions to Form 8829—make sure to check those out before proceeding.
Line 3 divides the two figures you determined above to calculate what total percentage of your home that you use for business purposes.
Lines 4-7 are for business owners specifically operating a daycare—you’ll use them to calculate what percentage of the day your home functions as the site of your daycare business. Heads up: you’ll need to know the number of hours your home operated as a daycare in that tax year. Ignore these lines if you don’t operate a daycare. (See the instructions to Form 8829 for more on the IRS’s “Special Computation for Certain Daycare Facilities.”)
Part II
In this part, you’ll calculate the total home office deduction, based on your rent, insurance, utilities, depreciation, and any other home expenses you incurred over the year. This is sometimes called your “allowable deduction” calculation.
Line 8 is tricky. Most people can just enter the tentative profit or loss from their business that they calculated in line 29 of Schedule C here, but if you conduct business in another location or had any capital gains or losses connected to work you did in your home office, you’ll have to account for them here. (See the instructions to Form 8829 for more.)
Lines 9-31 are for calculating all of the direct and indirect expenses associated with your home office, from mortgage interest and real estate taxes to utilities and rent. Many of these expenses can also be claimed on Schedule A, so make sure to consult the instructions to Form 8829 before completing this part. This is also where you’ll claim business expenses that may not fit under the traditional “home office” expense category (such as the cost of a business license).
Lines 32-36 are where you’ll calculate the allowable expenses for business use of your home, and where you’ll make any provisions for other business uses of your home.
Part III
Here you’ll determine what percentage of your home depreciation expenses you can include in the home office deduction.
Lines 37-39 will ask you for the cost or fair market value (whichever is less) of both your home and the land that it’s on, and will ask you to calculate the basis of the building alone by subtracting the value of the land from the amount entered in Line 37.
Line 40 will ask you to multiply the figure you came up with above by the percentage you calculated in line 7 to determine the total “business basis of building” (i.e. the total value of your home office).
Line 41 will ask you to enter the percentage figure from this table in the instructions to Form 8829 that applies to you.
Line 42 will ask you to multiply the previous two figures you came up with to figure out what percentage of the depreciation of your home you can include in your total home office deduction.
Part IV
This part is for calculating any applicable home office expenses that you couldn’t deduct last year, and are carrying over to this year (“carryover of unallowed expenses”).
Line 43 will ask you to subtract the value in Line 27 from the value in Line 26 to come up with your total operating expenses for the year.
Line 44 will ask you to subtract Line 33 from Line 32 to figure out excess casualty losses and depreciation.
What if I’m a work-from-home employee?
Thanks to the Tax Cuts and Jobs Act of 2017, you can no longer deduct your out-of-pocket home office expenses if you do work for an employer from home. If you’re self-employed, however, the Tax Cuts and Jobs Act didn’t change anything for you.
