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Statistics show that 73.3 million US taxpayers are freelancers, which should exceed 90 million before the end of the decade.
As a result, IRS Form 8829 is becoming increasingly important for remote workers who own small businesses or conduct their businesses as independent contractors. The form allows you to calculate direct and indirect home business expenses you can deduct from your taxes.
Completing the form and calculating the indirect business expenses can be tricky due to strict rules surrounding what constitutes business use of a home.
The tax document is an essential part of filing self-employment taxes that can reduce the tax burden of running a home-based business.
Let’s see how IRS Form 8829 can help unlock tax benefits for your home-based business.
Table of Contents
A Quick Guide to the Home Office Deduction
Self-employed individuals and small business owners can use the home office deduction to reduce their taxable income. IRS Form 8829 lets you compute the amount you can deduct from your taxes.
The deduction is available to taxpayers who exclusively operate their businesses from their homes. A room or any other space you use for business purposes must be your principal place of business, and you cannot use it for other purposes.
Areas of your home used for multiple purposes don’t meet home office requirements, so to make this deduction on your tax return, you must be able to prove that you frequently use the space as a home office.
Taking pictures of the room you use as a home office and ensuring that there’s nothing in the images you take to suggest that you utilize the space for some other purpose can increase your chances of qualifying for the home office deduction.
Calculating and Qualifying for the Home Office Deduction
You must meet specific criteria to claim the home office deduction. Most importantly, a part of your home must:
- Be used exclusively and regularly to conduct your business’ daily operations.
- Serve as a storage space for the products your business offers.
- Function as a daycare facility.
In addition, your home office must be the place where you meet your clients and your principal place of business. The space you claim as your home office doesn’t have to be attached to your home.
The IRS offers two methods of calculating the home office deduction, the simplified and regular deduction method.
Opting for the simplified method eliminates the need for filing Form 8829. But it also caps the maximum amount you can deduct from your taxes. You can only use this method to calculate the home office deduction if the size of your office doesn’t exceed 300sq/ft.
You should multiply the size of your office by $5 to determine the deduction amount using this method, and the maximum deduction amount you can claim with this method is $1,500.
The regular tax deduction method is more complex because you must calculate the percentage of your home you’re using for business purposes and then apply the percentage to calculate the deductible expenses.
You must use Form 8829 if you opt to calculate the home office deduction with this method.
Types of Deductible Expenses
The expenses you can deduct from your taxes can be direct or indirect. Direct expenses include repair and maintenance costs, computer depreciation, office supplies, or furnishing and decorating the office’s waiting area.
You can deduct 100% of these expenses because they have a direct positive impact on your business.
Indirect expenses apply to the entire household, including utilities, WiFi, cleaning services, rent, insurance, and real estate taxes.
To calculate your indirect expenses, you must first determine the percentage of your home you use for business purposes. Hence, you cannot deduct 100% of your indirect costs.
Understanding When to Use IRS Form 8829
The tax document helps you calculate the percentage of expenses you can claim on your tax return. As noted earlier, you should only file Form 8829 if you compute your expenses using the regular deduction method.
You’ll then add the deduction amount to Schedule C and use it to calculate how much you can reduce your taxable income.
The IRS can disallow the deduction if you cannot provide substantial evidence that you use a particular part of your home as your office.
You don’t have to own a home to qualify for this deduction because the IRS allows you to deduct indirect costs of maintaining a house or an apartment you’re renting.
What’s more, you can deduct a part of the rent from your taxes for the portion of your home you use as an office.
You must file Form 8829 with the tax return before the filing deadline if you want to deduct your direct and indirect expenses from your taxable income.
Preparing IRS Form 8829
Form 8829 is a single-page document divided into four sections, so completing it should be quick. Still, to save time, you should gather information about your home’s size, depreciation, real estate taxes, and casualty losses before preparing the form.
Depending on your filing method, you can submit this form electronically with tax software or mail its paper version to the IRS.
Part I
Enter your name and SSN at the top of the form and proceed to compute the area of your home used for business. You can do this by measuring the size of your home office and dividing its square footage by your home’s total square footage.
Alternatively, you can divide the number of rooms you use for business by the total number of rooms in your home, but only if all rooms are the same size.
As a result, you’ll have to use the so-called area method to determine the percentage of your home you use for business purposes.
Suppose the size of your office is 300sq/ft and your home’s total square footage is 1,200sq/ft. In this case, the percentage of your home you use as your office is 25%.
Small business owners who use their homes as daycares must use a different method based on the days and hours the space is used as a daycare unit to determine the business percentage.
Part II
The next step is to calculate the allowable deduction. You must figure out the amount on Line 29, Tentative Profit or Loss of Schedule C, to complete this section of Form 8829.
Afterward, you can list your direct and indirect expenses, including rent, insurance, or utilities, and use your home business percentage to calculate the deductible amount.
This section also contains carryovers from prior year operating expenses, excess casualty losses, and other factors contributing to your home office deduction.
Parts III & IV
The final two sections allow you to compute home depreciation and the carryover of unallowed expenses. To complete the form’s Part III, you must know the land’s value, the building’s basis, and the depreciation percentage.
The form’s final section contains only two lines, so you only have to enter operating expenses on Line 43 and excess casualty losses and depreciation on Line 44 to complete this part of the form.
Feel free to consult a tax professional if you need help with how to complete these sections of Form 8829. Schedule C and your tax return should include the final deduction amount.
Frequently Asked Questions
Making the home office deduction isn’t necessarily a red flag for an audit. Still, it can increase your chances of getting audited because the IRS wants to prevent taxpayers from loosely interpreting home office rules.
The instructions for Form 8829 indicate that the mortgage interest tax benefit expired on December 31, 2021, which means that eligible taxpayers can no longer deduct this expense from their taxes.
Freelancers and small business owners who run multiple businesses from the same home office can claim home office deductions. However, they must file a separate Form 8829 for each company.
The IRS doesn’t specify the number of workdays or work hours taxpayers must use their home office to qualify for this deduction, so as long as the area of your home is the principal place of business, you can make the home office deduction.
Figuring Out the Home Office Deduction with IRS Form 8829
Completing Form 8829 might seem intimidating for novice small business owners and independent contractors. Nonetheless, the challenging part isn’t filling out the form but defending the claims you make on the form before the IRS.
Besides determining which percentage of your home you’re using for business purposes or which unallowed expenses you can carry to the next tax year, you’ll also have to take extra care not to confuse personal expenses with business expenses. Consider hiring a tax professional instead of completing IRS Form 8829 and figuring out the home office deduction on your own to reduce the chances of going through an audit or having your tax refund delayed.
Author:
Logan is a practicing CPA and founder of Choice Tax Relief and Money Done Right. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.
