Do you use your home for business purposes? If so, you may be able to write off some of your home-related expenses, which can end up lowering your taxes.
This is called the home office deduction, and it’s one of the most misunderstood—and popular—types of tax write-offs for small business owners.
IRS Form 8829, titled “Expenses for Business Use of Your Home,” is the tax form you use to claim the regular home office deduction. You file it with your annual tax return, and information from this form appears on Line 30 of your Schedule C.
If you’re using the simplified method for the home office deduction (which allows you to take a standard deduction of $5 per square foot of your home office, up to 300 square feet), you don’t need to fill out Form 8829. Instead, you just claim the amount on your federal income tax return.
If you work at home as an employee and used to deduct your out-of-pocket home office expenses, you’re no longer eligible to deduct these under the Tax Cuts and Jobs Act that went into effect in 2018. If you’re self-employed, nothing has changed about the way you claim home office expenses.
So can I claim the home office deduction?
Form 8829 applies to anyone who takes the standard home office deduction. This raises a bigger question: Do I have a qualifying home office?
What qualifies as a home office?
In most cases, a qualifying home office needs to be used exclusively and regularly for business.
Your home can be any permanent place you reside—no hotels—but apartments, condos, and houseboats all apply. It also doesn’t matter whether you rent or own your place.
- Exclusively means your home office is used only for business purposes. If you share your home office with other people in your house, it’s not considered exclusive. Your home office needs to be a separate room or have a clear separation from your personal living space. The IRS doesn’t have any hard-and-fast guidelines about what counts as a clear separation, but it does note that a permanent partition isn’t necessary.
- Regularly means you must use your home office on an ongoing basis—you can’t work from home once in a while and claim it as a home office. This doesn’t mean you have to use it daily, but it does mean you have to use it consistently. So if you use your office two days a week, but on different days, that counts.
Tell me more. What actually counts as “regular use?”
The IRS has two ways it defines regular use. The first is pretty straightforward: you use your home office to meet with clients and customers in your normal course of business. For example, if you’re a therapist and have a treatment room in your home, that’s your home office.
The second definition is that your home office needs to be your principal place of business. This doesn’t mean you can’t have other business locations or conduct business outside of your home. It just means you have to do a good amount of administrative and management tasks in your home office.
Administrative and management tasks include:
- Bookkeeping and customer billing
- Answering emails and scheduling appointments
- Ordering supplies
- Conducting virtual meetings or taking customer phone calls
- Updating your website
- Participating in educational activities, like reading about your industry or taking an online class
Let’s say you’re a hairstylist and rent a space at a salon four times a week. You only use that space to see clients and don’t conduct any administrative activities there. Instead, you do all your administrative tasks in your home office, which includes booking client appointments, responding to email inquiries, learning new coloring techniques through virtual classes, and marketing your services online.
Even though you see clients outside of your home, your home office still qualifies as your principal place of business. Therefore, you can claim the home office deduction.
Are there exceptions to these rules?
Yes, there are a few exceptions to the regular and exclusive use rule. They are:
|Using your home to store inventory||You do not need to meet the exclusive use test, but you still have to use it regularly for storage.|
|Using your home as a daycare facility||You do not need to meet the exclusive use test, but you still have to use it regularly as a daycare and meet daycare licensing requirements.|
|Claiming a free-standing structure, like a shed, garage, or workshop||You need to use this structure regularly and exclusively for business, but it does not need to be your principal place of business or where you meet clients.|
What types of home office expenses can I deduct?
You can deduct two types of home office expenses: direct and indirect expenses.
- Direct home office expenses are fully deductible and are only related to your home office space, like repairs to your desk or a new office chair. In other words, you don’t share them with the rest of your living space. Because these expenses are directly related to your home office, you treat them like any other business expense.
- Indirect home office expenses are expenses that you incur for your entire home. You’ll write these expenses off as a percentage based on the percentage of your home that you use for business.
Indirect home office expenses include:
- Homeowners or renters insurance
- Homeowner association fees
- Repairs and maintenance made to your entire home, like recarpeting
- Security system
- House cleaning
- Utilities (like gas, electric, and trash)
Finally, there’s mortgage interest and property taxes. You can opt to write off your entire mortgage interest and property tax as an itemized personal deduction, or you can write off the business percentage as a home office expense and take the rest as a personal deduction.
Why would you pick this more complicated option? Because writing off the business portion as a home office expense can lower your taxable profits, and in turn, lower the taxable profits that you’ll pay self-employment tax on.
It’s easy to abuse home office tax deductions, so the IRS tends to scrutinize this section of your tax return more than others. Be sure you meet all the requirements and keep good records of your business expenses in case you get audited.
How much can I deduct?
How much you can write off is based on the percentage of your home that you use for business. To figure this out:
- Measure the total square footage of your home. You may be able to find this in a previous realtor’s listing or in your mortgage documents.
- Measure the square footage of your home office space.
- Divide your home office square footage by your total home square footage. The total is the deductible percentage.
For example, if your home is 2,000 square feet and your home office is 400 square feet, the calculation would look like this:
400 / 2,000 = 0.2
Therefore, you can deduct 20% of the indirect home office expenses listed above.
There are a few more things you should know about the limits of the home office deduction. First, you must have a positive net income to claim the deduction. If your business’s net income is negative, you can’t claim the home office deduction to increase your loss.
Second, you can only take the home office deduction up to your total net business income—you can’t use the home office deduction to create a loss in your business. For example, if your net business income is $5,000 and your home office expenses are $7,000, you can only deduct $5,000 of those $7,000 in expenses.
How do I fill out IRS Form 8829?
If you’re interested in claiming the home office deduction, you need to fill out Form 8829. Here are line-by-line instructions on how to complete the form.
Form 8829 Part I: Part of Your Home Used for Business
- Line 1: Enter the total square footage of your home office.
- Line 2: Enter the total square footage of your home.
- Line 3: Divide line 1 by line 2. The total is the percentage of your home used for business and your deductible percentage.
- Line 4: Only complete this line if you’re a daycare facility. Multiply the number of operating days you have in a year by the total hours you’re open each day. For example, if you’re open eight hours each day for 200 days a year, you’ll multiply 200 by eight. The product is 1,600, which is the number of hours you used your home for business.
- Line 5: If you used your home all year as a daycare facility, enter 8,760.
- If you stopped using your home as a daycare facility part way through the year, calculate the number of days that you used your home as a daycare facility and multiply that by 24. Enter that number here.
- Line 6: Divide line 4 by line 5. Enter the number here as a decimal.
- Line 7: If you’re not a daycare facility, enter the number in line 3 here. If you are a daycare facility, multiply line 6 by line 3. This is your deductible percentage.
Form 8829 Part II: Figure Your Allowable Deduction
- Line 8: Usually, you’ll enter your total profit from your business, which is on line 29 of your Schedule C. But if you have capital gains or losses from your home office, you’ll enter the amount on line 29 of your Schedule C plus any gains or minus any losses.
- If you work from your home office as well as another location, you’ll need to calculate how much of your gross income (line 7 of your Schedule C) came from working at your home office. One way of figuring this out is to consider how much time you spend at each location. For example, if you work from home 50% of the time, 50% of your gross income is from your home office.
- Then, subtract your total expenses (line 28 of your Schedule C), from the gross income from your home office. This amount is what you put on line 8.
- Column (a): This is for expenses directly related to your home office. Enter the full amount of your direct expenses in this column.
- Column(b): This is for indirect expenses, which are the expenses you absorb for your home office space and the personal areas of your home. These expenses are shared professionally and personally. Enter the full amount of your indirect expenses in this column.
- Line 9: If you fill ou Form 4684 and have casualty losses, complete this line. Casualty losses are the loss or damage of your property due to a sudden, unexpected, or unusual event, like a natural disaster. You can find more details about how to complete this line in the Instructions for Form 8829.
- Line 10: Here’s where you’ll report your mortgage interest. Mortgage interest is an indirect expense unless you pay mortgage interest for a separate structure that you use for your business.
- You can only enter your mortgage interest here if you’re not taking the standard deduction. If you do itemize your deductions, you can learn more about how to calculate the amount on line 10.
- Line 11: Here, enter real estate taxes that you’ve paid. Like mortgage interest, real estate taxes are considered an indirect expense unless you paid taxes for a separate structure that you use for your business.
- Do you claim the standard deduction? If you do, you can’t enter an amount in this line. If you itemize your deduction, use these instructions to calculate how much to enter on line 11.
- Line 12: Add up the totals from lines 9, 10, and 11 for each column.
- Line 13b: Multiply the total from line 12b by the percentage on line 7.
- Line 14: Add the total from line 12a to the amount on line 13.
- Line 15: Subtract the amount on line 14 from the amount on line 8. If the amount is zero or a negative number, enter zero.
- Line 16: If you take the standard deduction, enter the total mortgage interest you paid. If you itemize your deductions and you can’t write off all of your mortgage interest on your Schedule A, enter the unclaimed amount here. Here are more details from the IRS on how to do that.
- Line 17: If you take the standard deduction, enter the total real estate taxes you paid. For folks who itemize deductions, read the instructions on how to complete this line.
- Line 18: Enter the total amount of homeowners or renters insurance you paid.
- Line 19: If you don’t own a home, enter the total amount of rent you paid.
- Line 20: Enter the total amount of repairs and maintenance you paid.
- Line 21: Enter the total amount of utilities you paid.
- Line 22: If you have other home expenses that don’t fit into the categories above, you can enter them here.
- Line 23: Add up lines 16 through 22.
- Line 24b: Multiply line 13b by the percentage in line 7. Enter the amount you get here.
- Line 25: If you filed Form 8829 last year, look at line 42 and enter that amount here.
- Line 26: Add line 23a, line 24, and line 25 together.
- Line 27: Compare line 15 and line 26. Then, enter the amount that is the smaller of the two.
- Line 28: Subtract line 27 from line 15
- Line 29: If you have excess casualty loss from what you entered on line 9, multiply the excess amount by your business percentage (line 7).
- Line 30: If you’re filling out the form line by line, skip down to Part III and complete that section before returning to Line 30 and continuing with the form.
- Line 31: This line is for expenses that you weren’t able to claim last year (due to the deductibility limits of the home office deduction) that you’re carrying over to this year. If you filled out Form 8829 last year, look at last year’s form and enter the amount on line 43 here.
- Line 32: Add up lines 29 through line 31.
- Line 33: Compare line 28 and line 32. Enter the amount that is the smaller of the two.
- Line 34: Add up line 14, line 27, and line 33.
- Line 35: If you have casualty loss, you’ll need to split out the casualty loss portion from the depreciation portion in lines 14 and 33. Then, you’ll enter that amount here and also on Form 4684. You can learn more from the IRS on how to do that.
- Line 36: Subtract line 35 from line 34. At long last, here’s your total home office deduction!
Form 8829 Part III: Depreciation of Your Home
- Line 37: Enter the smaller of these two numbers: the cost of your home (including the land) on the first day you started doing business from your home office or the fair market value of your home the first day you started doing business from your home office.
- Line 38: Enter the smaller of these two numbers: the cost of the land your home sits on or the fair market value of the land on the date that you began working from your home.
- Line 39: Subtract line 38 from line 37.
- Line 40: Multiply line 39 by line 7, your business percentage.
- Line 41: The number you enter on line 41 varies based on when you first started using your home for business. The IRS instructions include a handy chart that shows you what percentage to enter on line 41.
- Line 42: Multiply line 40 by line 41. The total is your allowable depreciation. Remember, you’ll put this number on line 30.
Form 8829 Part IV: Carryover of Unallowed Expenses
- Line 43: Subtract line 27 from line 26. If the number is zero or negative, enter zero. This is the number of home office expenses that you cannot write off this year but you can carry over to next year.
- Line 44: Subtract line 33 from line 32. If the number is zero or a negative number, enter zero.
Writing off your home office isn’t as scary, or complicated, as it seems. Now that you know how to claim the home office deduction, you’ll be saving some serious dough on your taxes for years to come.
For more information about tax deductions for your home office, check out Publication 587.