What Is Schedule 8829 for Business Use of Your Home?

Self-employed individuals who use a portion of their residence for work may be able to deduct certain home expenses. IRS Form 8829, Expenses for Business Use of Your Home, is used to calculate this deduction using the “actual expense method,” which involves itemizing and allocating specific costs. The resulting deduction can lower your business’s taxable income.

Determining Your Eligibility to File

To use Schedule 8829, you must satisfy two IRS tests. The first is the “regular and exclusive use” test. This means a specific area of your home must be used consistently for your business and for no other purpose; a desk in a corner of a family room that is only used for work can qualify. An area used for both business and personal activities, such as a dining room table, would not meet the exclusive use standard.

The second requirement is the “principal place of business” test. Your home office must be the primary location where you conduct substantial administrative or management activities for your business, and you must not have another fixed location where you perform these tasks. For example, if you are a plumber who performs services at customer locations but you use a home office for billing, scheduling, and ordering supplies, your home office would likely qualify as your principal place of business.

This deduction is for self-employed individuals, such as sole proprietors, independent contractors, and partners who file a Schedule C. W-2 employees are not eligible to claim a home office deduction. Taxpayers also have an alternative to the actual expense method called the simplified method, which provides a standard deduction of $5 per square foot (up to 300 square feet) and does not require filing Schedule 8829.

Information and Expenses to Gather

Before completing Schedule 8829, you must collect specific figures, starting with measuring the physical space. You will need the total square footage of your home and the precise square footage of the area used regularly and exclusively for business. These two measurements are used for allocating costs between personal and business use.

Next, you must categorize your expenses into two groups: direct and indirect. Direct expenses are costs that apply only to the business part of your home and are 100% deductible. Examples include the cost of painting only your office or repairs made solely to that specific area.

Indirect expenses are costs associated with maintaining and running your entire home, which must be allocated based on the percentage of your home used for business. You will need to gather records for expenses like mortgage interest, homeowners or renters insurance, utilities, general home repairs, and real estate taxes. Annual statements for mortgage interest (Form 1098), property tax bills, and utility bills will provide the necessary totals.

Calculating the Home Office Deduction

Part of Your Home Used for Business

Part I of the form establishes the percentage of your home used for business. You will enter the square footage of your business space on Line 1 and the total square footage of your home on Line 2. Dividing the business area by the total area yields the business-use percentage, which is entered on Line 3. This percentage is the figure used to prorate your indirect home expenses.

Figuring Your Allowable Deduction

In Part II, the form separates your direct and indirect expenses. You will list your indirect expenses, such as real estate taxes and deductible mortgage interest, and multiply the total by the business-use percentage from Part I. You then add your direct expenses, which are fully deductible, to this prorated amount. The income limitation dictates that your total home office deduction cannot exceed the gross income your business generates. If your business has a net loss before this deduction, you may not be able to take it in the current year.

Depreciation of Your Home

For homeowners, Part III calculates the depreciation deduction for the business portion of the home. Depreciation is an allowance for the wear and tear on property. To calculate this, you need your home’s basis (its cost) and the date you first started using it for business. The IRS provides specific depreciation tables, and the form uses a 39-year recovery period to determine the annual depreciation amount for the business-use portion of your home.

Carryover of Unallowed Expenses

Part IV tracks expenses that were not deductible in the current year due to the income limitation. If your allowable home office expenses exceeded your business’s gross income, the excess amount is not lost. You can carry these unallowed expenses forward to the following tax year, where they will again be subject to that year’s income limitation.

Reporting the Deduction on Your Tax Return

After calculating your total allowable deduction on Schedule 8829, you must report this figure on your tax return. The total deduction from Line 36 of Form 8829 is transferred to Line 30 of Schedule C (Form 1040), Profit or Loss from Business. This entry combines your home office deduction with all other business expenses to determine your net profit or loss for the year. The completed Schedule 8829 must be filed with your Form 1040 tax return.